Table of Contents

PAGE
SR. NO. TOPIC
NO.
INTRODUCTION
CONCEPT OF MUTUAL FUND

INVESTOR EARN FROM MUTUAL FUND

1 6
ADVANTAGES OF MUTUAL FUND

DISADVANTAGES OF MUTUAL FUND

FREQUENTIY USED TERM

2 TYPES OF MUTUAL FUND SCHEMES 15

3 ORGANIZATION OF A MUTUAL FUND 30
FUND MANAGEMENT STYLE & STRUCTURING OF
4 33
PORTFOLIO
INDIVIDUAL SCHEME ANALYSIS 49
- THEMATIC FUNDS 49
- INDEX FUNDS 69
5
- EQUITY LINKED SAVING SCHEMES 91
- DIVERSIFIED EQUITY FUNDS 106
- DEBT FUNDS 126
6 CONSLUSION
7 BIBLIOGRAPHY 137
 Ch. 1- Introduction

The one investment vehicle that has truly come of age in India in the past decade is
mutual funds. Today, the mutual fund industry in the country manages around Rs
329,162 crore (As of Dec, 2006) of assets, a large part of which comes from retail
investors. And this amount is invested not just in equities, but also in the entire gamut of
debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are
out of reach of most retail investors, particularly government securities and money
market instruments.
Specialization is the order of the day, be it with regard to a scheme’s investment objective
or its targeted investment universe. Given the plethora of options on hand and the hard-
sell adopted by mutual funds vying for a piece of your savings, finding the right scheme
can sometimes seem a bit daunting. Mind you, it’s not just about going with the fund that
gives you the highest returns. It’s also about managing risk–finding funds that suit your
risk appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through
mutual funds? To answer that, we need to get down to brass tacks–what exactly is a
mutual fund?
Very simply, a mutual fund is an investment vehicle that pools in the monies of several
investors, and collectively invests this amount in either the equity market or the debt
market, or both, depending upon the fund’s objective. This means you can access either
the equity or the debt market, or both, without investing directly in equity or debt

Concept of a Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most

2
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow
chart below describes broadly the working of a mutual fund:-

Savings form an important part of the economy of any nation. With savings invested in
various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents multiple avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has ignited the growth rate in
mutual fund industry to provide reasonable options for an ordinary man to invest his
savings.
Investment goals vary from person to person. While somebody wants security, others
might give more weightage to returns alone. Somebody else might want to plan for his
child’s education while somebody might be saving for the proverbial rainy day or even
life after retirement. With objectives defying any range, it is obvious that the products
required will vary as well.

Investors earn from a Mutual Fund in three ways:

1. Income is earned from dividends declared by mutual fund schemes from time to
time.
2. If the fund sells securities that have increased in price, the fund has a capital gain.
This is reflected in the price of each unit. When investors sell these units at prices
higher than their purchase price, they stand to make a gain.

3
 3. If fund holdings increase in price but are not sold by the fund manager, the fund's
unit price increases. You can then sell your mutual fund units for a profit. This is
tantamount to a valuation gain.

Though still at a nascent stage, Indian MF industry offers a plethora of schemes and
serves broadly all type of investors. The range of products includes equity funds, debt,
liquid, gilt and balanced funds. There are also funds meant exclusively for young and old,
small and large investors. Moreover, the setup of a legal structure, which has enough
teeth to safeguard investors’ interest, ensures that the investors are not cheated out of
their hard-earned money. All in all, benefits provided by them cut across the boundaries
of investor category and thus create for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt
for mutual funds for the sole reason that all benefits come in a package.

Advantages of Mutual Funds

1. Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of
companies and selects suitable investments to achieve the objectives of the scheme. This
risk of default by any company that one has chosen to invest in, can be minimized by
investing in mutual funds as the fund managers analyze the companies’ financials more
minutely than an individual can do as they have the expertise to do so. They can manage
the maturity of their portfolio by investing in instruments of varied maturity profiles.
2. Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries
and sectors. This diversification reduces the risk because seldom do all stocks decline at
the same time and in the same proportion. You achieve this diversification through a
Mutual Fund with far less money than you can do on your own.
3. Convenient Administration

4
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such
as bad deliveries, delayed payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.
4. Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher return
as they invest in a diversified basket of selected securities. Apart from liquidity, these
funds have also provided very good post-tax returns on year to year basis. Even
historically, we find that some of the debt funds have generated superior returns at
relatively low level of risks. On an average debt funds have posted returns over 10
percent over one-year horizon. The best performing funds have given returns of around
14 percent in the last one-year period. In nutshell we can say that these funds have
delivered more than what one expects of debt avenues such as post office schemes or
bank fixed deposits. Though they are charged with a dividend distribution tax on
dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received
is still tax free in the hands of investor and is generally much more than all other avenues,
on a post tax basis.
5. Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing
in the capital markets because the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.
6. Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the Mutual Fund. Since there is no penalty on
pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough
liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices
of the securities as a result of interest rate variation and one can benefits from any such
price movement.
7. Transparency

5
Investors get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.
8. Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans; you can systematically invest or withdraw funds according to your
needs and convenience.
9. Affordability
A single person cannot invest in multiple high-priced stocks for the sole reason that his
pockets are not likely to be deep enough. This limits him from diversifying his portfolio
as well as benefiting from multiple investments. Here again, investing through MF route
enables an investor to invest in many good stocks and reap benefits even through a small
investment. Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy.
10. Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
11. Well Regulated
All Mutual Funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors. The operations of Mutual
Funds are regularly monitored by SEBI.
12. Tax Benefits
Last but not the least, mutual funds offer significant tax advantages. Dividends
distributed by them are tax-free in the hands of the investor. They also give you the
advantages of capital gains taxation. If you hold units beyond one year, you get the
benefits of indexation. Simply put, indexation benefits increase your purchase cost by a
certain portion, depending upon the yearly cost-inflation index (which is calculated to
account for rising inflation), thereby reducing the gap between your actual purchase cost
and selling price. This reduces your tax liability. What’s more, tax-saving schemes and
pension schemes give you the added advantage of benefits under Section 88. You can

6
avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in
a year

Disadvantages of mutual funds

Mutual funds are good investment vehicles to navigate the complex and unpredictable
world of investments. However, even mutual funds have some inherent drawbacks.
Understand these before you commit your money to a mutual fund.
1. No assured returns and no protection of capital
If you are planning to go with a mutual fund, this must be your mantra: mutual funds do
not offer assured returns and carry risk. For instance, unlike bank deposits, your
investment in a mutual fund can fall in value. In addition, mutual funds are not insured or
guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per
bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the
Reserve Bank of India). There are strict norms for any fund that assures returns and it is
now compulsory for funds to establish that they have resources to back such assurances.
This is because most closed-end funds that assured returns in the early-nineties failed to
stick to their assurances made at the time of launch, resulting in losses to investors. A
scheme cannot make any guarantee of return, without stating the name of the guarantor,
and disclosing the net worth of the guarantor. The past performance of the assured return
schemes should also be given.
2. Restrictive gains
Diversification helps, if risk minimisation is your objective. However, the lack of
investment focus also means you gain less than if you had invested directly in a single
security.
Assume, Reliance appreciated 50 per cent. A direct investment in the stock would
appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10
per cent of its corpus in Reliance, will see only a 5 per cent appreciation.
3. Taxes

7
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If your fund makes a profit on its sales, you
will pay taxes on the income you receive, even if you reinvest the money you made.
4. Management risk
When you invest in a mutual fund, you depend on the fund's manager to make the right
decisions regarding the fund's portfolio. If the manager does not perform as well as you
had hoped, you might not make as much money on your investment as you expected. Of
course, if you invest in Index Funds, you forego management risk, because these funds
do not employ managers.

History of Mutual Funds in India

1963 Establishment of Unit Trust of India

1964 Unit Scheme 1964 launched
1987 Entry of non-UTI, Public Sector mutual funds
1993 Entry of private sector funds
First Mutual Fund regulations came into being
1996 Substitution of prevalent rules by SEBI (Mutual Funds) Regulations 1996
2003 UTI bifurcated into two separate entities
- Specified Undertaking of Unit Trust of India
- UTI Mutual Fund
2004 Existence of 421 schemes, managing assets worth Rs. 153108

8
Frequently used terms

 Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities.
The per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.

 Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may
include a sales load.

 Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a
back-end load. This is also called Bid Price.

 Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on maturity. Such prices are NAV related.

 Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’
load. Schemes that do not charge a load are called ‘No Load’ schemes.

 Repurchase or ‘Back-end’Load
Is a charge collected by a scheme when it buys back the units from the unitholders.

9
 Ch. 2- Types of mutual fund schemes

A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial
position, risk tolerance and return expectations etc. The table below gives an overview
into the existing types of schemes in the Industry.

By structure:
a) open-ended schemes
b) close-ended schemes
c) interval schemes

By investment objective:
a) growth schemes
b) income schemes
c) Balanced schemes
d) money market schemes

Other schemes:
a) Tax saving schemes
b) special schemes
c) index schemes
d) sector specific schemes

By Structure

a) Open-ended schemes
Open-ended or open mutual funds are much more common than closed-ended funds and
meet the true definition of a mutual fund – a financial intermediary that allows a group of
investors to pool their money together to meet an investment objective– to make money!
An individual or team of professional money managers manage the pooled assets and

10
choose investments, which create the fund’s portfolio. They are established by a fund
sponsor, usually a mutual fund company, and valued by the fund company or an outside
agent. This means that the fund’s portfolio is valued at "fair market" value, which is the
closing market value for listed public securities. An open-ended fund can be freely sold
and repurchased by investors.
 Buying and Selling:
Open funds sell and redeem shares at any time directly to shareholders. To make an
investment, you purchase a number of shares through a representative, or if you have
an account with the investment firm, you can buy online, or send a check. The price
you pay per share will be based on the fund’s net asset value as determined by the
mutual fund company. Open funds have no time duration, and can be purchased or
redeemed at any time, but not on the stock market. An open fund issues and redeems
shares on demand, whenever investors put money into the fund or take it out. Since
this happens routinely every day, total assets of the fund grow and shrink as money
flows in and out daily. The more investors buy a fund, the more shares there will be.
There's no limit to the number of shares the fund can issue. Nor is the value of each
individual share affected by the number outstanding, because net asset value is
determined solely by the change in prices of the stocks or bonds the fund owns, not
the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales
charge), usually a percentage of the net asset value, which is deducted from the
amount invested.
 Advantages:
Open funds are much more flexible and provide instant liquidity as funds sell shares
daily. You will generally get a redemption (sell) request processed promptly, and
receive your proceeds by check in 3-4 days. A majority of open mutual funds also
allow transferring among various funds of the same “family” without charging any
fees. Open funds range in risk depending on their investment strategies and
objectives, but still provide flexibility and the benefit of diversified investments,
allowing your assets to be allocated among many different types of holdings.
Diversifying your investment is key because your assets are not impacted by the

11
 fluctuation price of only one stock. If a stock in the fund drops in value, it may not
impact your total investment as another holding in the fund may be up. But, if you
have all of your assets in that one stock, and it takes a dive, you’re likely to feel a
more considerable loss.
 Risks:
Risk depends on the quality and the kind of portfolio you invest in. One unique risk to
open funds is that they may be subject to inflows at one time or sudden redemptions,
which leads to a spurt or a fall in the portfolio value, thus affecting your returns. Also,
some funds invest in certain sectors or industries in which the value of the in the
portfolio can fluctuate due to various market forces, thus affecting the returns of the
fund.

b) Close-ended schemes
Close-ended or closed mutual funds are really financial securities that are traded on the
stock market. Similar to a company, a closed-ended fund issues a fixed number of shares
in an initial public offering, which trade on an exchange. Share prices are determined not
by the total net asset value (NAV), but by investor demand. A sponsor, either a mutual
fund company or investment dealer, will raise funds through a process commonly known
as underwriting to create a fund with specific investment objectives. The fund retains an
investment manager to manage the fund assets in the manner specified.
 Buying and Selling:
Unlike standard mutual funds, you cannot simply mail a check and buy closed fund
shares at the calculated net asset value price. Shares are purchased in the open market
similar to stocks. Information regarding prices and net asset values are listed on stock
exchanges, however, liquidity is very poor. The time to buy closed funds is
immediately after they are issued. Often the share price drops below the net asset
value, thus selling at a discount. A minimum investment of as much as $5000 may
apply, and unlike the more common open funds discussed below, there is typically a
five-year commitment.
 Advantages:

12
 The prospect of buying closed funds at a discount makes them appealing to
experienced investors. The discount is the difference between the market price of the
closed-end fund and its total net asset value. As the stocks in the fund increase in
value, the discount usually decreases and becomes a premium instead. Savvy
investors search for closed-end funds with solid returns that are trading at large
discounts and then bet that the gap between the discount and the underlying asset
value will close. So one advantage to closed-end funds is that you can still enjoy the
benefits of professional investment management and a diversified portfolio of high
quality stocks, with the ability to buy at a discount.
 Risks:
Investing in closed-end funds is more appropriate for seasoned investors. Depending
on their investment objective and underlying portfolio, closed-ended funds can be
fairly volatile, and their value can fluctuate drastically. Shares can trade at a hefty
discount and deprive you from realizing the true value of your shares. Since there is
no liquidity, investors must buy a fund with a strong portfolio, when units are trading
at a good discount, and the stock market is in position to rise.

By investment objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:

a) Growth / Equity Oriented Schemes

The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such funds
have comparatively high risks. These schemes provide different options to the investors
like dividend option, capital appreciation, etc. and the investors may choose an option
depending on their preferences. The investors must indicate the option in the application
form. The mutual funds also allow the investors to change the options at a later date.

13
Growth schemes are good for investors having a long-term outlook seeking appreciation
over a period of time.

Equity funds
As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With
share prices fluctuating daily, such funds show volatile performance, even losses.
However, these funds can yield great capital appreciation as, historically, equities have
outperformed all asset classes. At present, there are four types of equity funds available in
the market. In the increasing order of risk, these are:

Index funds
These funds track a key stock market index, like the BSE (Bombay Stock Exchange)
Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio
mirrors the index they track, both in terms of composition and the individual stock
weightages. For instance, an index fund that tracks the Sensex will invest only in the
Sensex stocks. The idea is to replicate the performance of the benchmarked index to near
accuracy.
Investing through index funds is a passive investment strategy, as a fund’s performance
will invariably mimic the index concerned, barring a minor "tracking error". Usually,
there’s a difference between the total returns given by a stock index and those given by
index funds benchmarked to it. Termed as tracking error, it arises because the index fund
charges management fees, marketing expenses and transaction costs (impact cost and
brokerage) to its unitholders. So, if the Sensex appreciates 10 per cent during a particular
period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have
a tracking error of 1 per cent.
To illustrate with an example, assume you invested Rs 1,000 in an index fund based on
the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when
the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to
an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down

14
your annualised return to 16.2 per cent. Obviously, the lower the tracking error, the better
the index fund.

Diversified funds
Such funds have the mandate to invest in the entire universe of stocks. Although by
definition, such funds are meant to have a diversified portfolio (spread across industries
and companies), the stock selection is entirely the prerogative of the fund manager.
This discretionary power in the hands of the fund manager can work both ways for an
equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund
to deliver market-beating returns; on the other hand, if the fund manager’s picks languish,
the returns will be far lower.
The crux of the matter is that your returns from a diversified fund depend a lot on the
fund manager’s capabilities to make the right investment decisions. On your part, watch
out for the extent of diversification prescribed and practised by your fund manager.
Understand that a portfolio concentrated in a few sectors or companies is a high risk, high
return proposition. If you don’t want to take on a high degree of risk, stick to funds that
are diversified not just in name but also in appearance.

Tax-saving funds
Also known as ELSS or equity-linked savings schemes, these funds offer benefits under
Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an
ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can
invest more than Rs 10,000, but you won’t get the Section 88 benefits for the amount in
excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme
for three years.
In terms of investment profile, tax-saving funds are like diversified funds. The one
difference is that because of the three year lock-in clause, tax-saving funds get more time
to reap the benefits from their stock picks, unlike plain diversified funds, whose
portfolios sometimes tend to get dictated by redemption compulsions.

15
Sector funds
The riskiest among equity funds, sector funds invest only in stocks of a specific industry,
say IT or FMCG. A sector fund’s NAV will zoom if the sector performs well; however, if
the sector languishes, the scheme’s NAV too will stay depressed.
Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries
alternate between periods of strong growth and bouts of slowdowns. The way to make
money from sector funds is to catch these cycles–get in when the sector is poised for an
upswing and exit before it slips back. Therefore, unless you understand a sector well
enough to make such calls, and get them right, avoid sector funds.

b) Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of fluctuations in
equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these fluctuations.
Such funds attempt to generate a steady income while preserving investors’ capital.
Therefore, they invest exclusively in fixed-income instruments securities like bonds,
debentures, Government of India securities, and money market instruments such as
certificates of deposit (CD), commercial paper (CP) and call money. There are basically
three types of debt funds.

Income funds
By definition, such funds can invest in the entire gamut of debt instruments. Most income
funds park a major part of their corpus in corporate bonds and debentures, as the returns
there are the higher than those available on government-backed paper. But there is also
the risk of default–a company could fail to service its debt obligations.

16
Gilt funds
They invest only in government securities and T-bills–instruments on which repayment
of principal and periodic payment of interest is assured by the government. So, unlike
income funds, they don’t face the spectre of default on their investments. This element of
safety is why, in normal market conditions, gilt funds tend to give marginally lower
returns than income funds.

Liquid funds
They invest in money market instruments (duration of up to one year) such as treasury
bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile.
They are ideal for investors seeking low-risk investment avenues to park their short-term
surpluses.

The ‘risk’ in debt funds

Although debt funds invest in fixed-income instruments, it doesn’t follow that they are
risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so
don’t show the same degree of volatility in their performance as equity funds. Still, they
face some inherent risk, namely credit risk, interest rate risk and liquidity risk.

 Interest rate risk: This is common to all three types of debt funds, and is the prime
reason why the NAVs of debt funds don’t show a steady, consistent rise. Interest
rate risk arises as a result of the inverse relationship between interest rates and
prices of debt securities. Prices of debt securities react to changes in investor
perceptions on interest rates in the economy and on the prevelant demand and
supply for debt paper. If interest rates rise, prices of existing debt securities fall to
realign themselves with the new market yield. This, in turn, brings down the NAV
of a debt fund. On the other hand, if interest rates fall, existing debt securities
become more precious, and rise in value, in line with the new market yield. This
pushes up the NAVs of debt funds.

17
  Credit risk: This throws light on the quality of debt instruments a fund holds. In
the case of debt instruments, safety of principal and timely payment of interest is
paramount. There is no credit risk attached with government paper, but that is not
the case with debt securities issued by companies. The ability of a company to
meet its obligations on the debt securities issued by it is determined by the credit
rating given to its debt paper. The higher the credit rating of the instrument, the
lower is the chance of the issuer defaulting on the underlying commitments, and
vice-versa. A higher-rated debt paper is also normally much more liquid than
lower-rated paper. Credit risk is not an issue with gilt funds and liquid funds. Gilt
funds invest only in government paper, which are safe. Liquid funds too make a
bulk of their investments in avenues that promise a high degree of safety. For
income funds, however, credit risk is real, as they invest primarily in corporate
paper.

 Liquidity risk: This refers to the ease with which a security can be sold in the
market. While there is brisk trading in government securities and money market
instruments, corporate securities aren’t actively traded. More so, when you go
down the rating scale–there is little demand for low-rated debt paper. As with
credit risk, gilt funds and liquid risk don’t face any liquidity risk. That’s not the
case with income funds, though. An income fund that has a big exposure to low-
rated debt instruments could find it difficult to raise money when faced with large
redemptions.

c) Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their
offer documents. These are appropriate for investors looking for moderate growth. They
generally invest 40-60% in equity and debt instruments. These funds are also affected

18
because of fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds.
As the name suggests, balanced funds have an exposure to both equity and debt
instruments. They invest in a pre-determined proportion in equity and debt–normally
60:40 in favour of equity. On the risk ladder, they fall somewhere between equity and
debt funds, depending on the fund’s debt-equity spilt–the higher the equity holding, the
higher the risk. Therefore, they are a good option for investors who would like greater
returns than from pure debt, and are willing to take on a little more risk in the process.

d) Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and inter-
bank call money, government securities, etc. Returns on these schemes fluctuate much
less compared to other funds. These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short periods.

Other types of funds

a) Pooled Funds
A "pooled fund" is a unit trust in which investors contribute funds that are then invested,
or managed, by a third party. A pooled fund operates like a mutual fund, but is not
required to have a prospectus under securities law. Pooled funds are offered by trust
companies, investment management firms, insurance companies, and other organizations.
Pooled funds and mutual funds are substantially the same, but differ in their legal form.
Like a mutual fund, a pooled fund is a trust that is set up under a "trust indenture". This
specifies how the pooled fund will operate and what the duties of the various parties to
the trust indenture will be. The trust indenture specifies an investment policy for the
pooled fund and how management fees will be charged. Pooled funds, like mutual funds,
are "unit trusts". This means that investors deposit funds into the trust in exchange for

19
"units" of the fund, which reflect a pro-rata share of the fund's investments. The fund
trust indenture will specify how units are issued and redeemed, as well as, the frequency
and procedures for valuations. Pooled funds can be either "closed" or "open". An "open"
pooled fund is the most common type of pooled fund, and allows units to be redeemed at
scheduled valuations. A "closed" pooled fund does not allow redemptions, except in
specific circumstances or at termination of the trust. Closed pooled funds are usually
established to hold illiquid investments such as real estate or very specialized investment
programs, such as hedge funds. The major difference between pooled funds and mutual
funds is their legal status under securities law. Pooled funds are not "public" investments,
which means investment and trading in pooled funds is restricted. Securities legislation
define the rules for a "public" security. Publicly issued securities must meet certain
requirements before issue, particularly in information disclosure through their prospectus,
or reporting by issuers. Pooled funds are exempt from prospectus requirements under
securities law, usually under the "private placement", or "sophisticated investor", clauses
in the Securities Act. This means that investments in pooled funds must be over
$150,000. Financial institutions such as banks, trust companies or investment counselling
firms are allowed to invest their clients in their own pooled funds, by specific exemptions
granted under the Securities Act. Each pooled fund investment must be reported to the
relevant Securities Commission. Once a client is invested in a pool fund, the result is
identical to being in a mutual fund with the same investment mandate. Fees for pooled
funds can either be charged inside or outside the fund. Valuation of pooled funds can be
less frequent, as there tends to be less activity with fewer and more sophisticated pooled
fund investors. Pooled fund fees are usually lower than mutual funds, as these funds are
created to deal with larger investors. Pooled funds are allowed to charge their expenses
from operations against the fund assets, and the trust indenture provides for the sponsor,
or trustee, to hire outside agents to perform certain tasks, such as custody and unit record-
keeping.

20
 b) Insurance Segregated Funds
An insurance segregated fund is an insurance contract issued under insurance legislation
by an insurance company. Its value is based on the performance of a portfolio of
marketable securities, such as stocks and bonds.
As an insurance contract, a segregated fund is an obligation of an insurance company and
forms part of its assets. Insurance companies "segregate" the portfolios which these
contracts are based on, dividing these assets from their general assets. The contracts have
a minimum value, the price at which they were issued.
It is important to realize that a insurance segregated fund might look and act like a mutual
fund, but that it is actually something quite different. A mutual fund is a trust, or
sometimes a company, which owns title to the actual securities in the funds. The
unitholders own the trust which in turn owns the assets. An insurance segregated fund is
an insurance contract or a "variable rate annuity". Legally, the insurance company issues
the contract the same way it would an annuity or life insurance policy under the relevant
insurance legislation. The buyer or "policy holder" has contracted for a payment that is
based on the underlying prices of the portfolio that supports the contract but does not
have a direct claim or ownership on the securities that form the portfolio. Although
insurance companies "segregate" the assets to support these contracts, the holder of the
contract does not own these assets.
The insurance contract nature of a segregated fund makes for an interesting feature that
insurance companies often use in their marketing. The contract can be issued with an
initial "book value" that the company can agree to pay no matter what the actual value of
the portfolio supporting the contract. If the market value of the portfolio falls below the
book value, the company agrees to pay no less than the book value which is known as the
"minimum value guarantee" or the "higher of book or market". Initially, this guarantee
feature has some value. Since marketable securities increase over longer periods of time
it becomes less important over time.
Another wrinkle of segregated funds is their tax status. Since they are insurance
contracts, they are taxed as such. Sometimes segregated funds are used as investment
options for "universal" or "whole life" life insurance which provides a savings option as

21
well as insurance. Life companies market the tax shelter aspects of these contracts, which
allow compounding of investment income untaxed while inside the insurance contract.
Another sales aspect of segregated funds is their characteristics under bankruptcy
legislation in some jurisdictions. In Canada, for example, an insurance contract is not
available to creditors in a bankruptcy. This means an RRSP that uses segregated funds
would be protected from creditors in a bankruptcy while an RRSP which invested in
mutual funds would be exposed.
In summary, although insurance segregated funds look and function like mutual funds,
they are actually insurance contracts based on the valuation of a portfolio of marketable
securities. As always, investors are wise to consider all the aspects of insurance contracts
in their legal jurisdiction prior to investment.

c) Specific Sectoral & Thematic funds /schemes

These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. Thematic funds are those fund
which invest in a stocks which will benefit from a particular theme like Outsourcing,
Infrastructure etc. The returns in these funds are dependent on the performance of the
respective sectors/industries. While these funds may give higher returns, they are more
risky compared to diversified funds. Restrain the urge to invest in sector/thematic funds
no matter how compelling an argument your agent or the fund house makes. Over the
long-term, there is little value that a restrictive and narrow theme can bring to the table. It
is best to opt for a broad investment mandate that is best championed by well-diversified
equity funds.

UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and Exchange
Board of India for an omnibus fund that will have six options. The UTI Thematic Fund is
the umbrella fund.
It will have sub-funds that will focus on large-cap stocks, mid-cap stocks, auto, banking,
PSU stocks and basic industries. UTI now has a UTI Growth Sectors Umbrella with five

22
options that focus on investing in stocks in the services, petro, healthcare
pharmaceuticals, information technology, and consumer products.
The new fund also proposes to provide investors four automatic triggers that could be
used for exit: value, appreciation, date and stop loss.

23
 Ch. 3- Organization of a Mutual Fund

The structure of mutual funds in India is governed by SEBI (Mutual Fund) Regulations,
1996. In India, is mandatory to have a three tier structure of Sponsor-Trustee-Asset
Management Company.

Sponsor
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. The sponsor establishes the mutual fund and registers the same
with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval
of SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track
record of business interest in the financial markets. Sponsor must have been profit
making in at least 3 of the above 5 years. Sponsor must contribute at least 40% of the net
worth of the Investment Managed and meet the eligibility criteria prescribed under the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor
is not responsible or liable for any loss or shortfall resulting from the operation of the
Schemes beyond the initial contribution made by it towards setting up of the Mutual
Fund.

Trust

24
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian
Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian
Registration Act, 1908.

Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of
individuals). The main responsibility of the Trustee is to safeguard the interest of the unit
holders and inter alia ensure that the AMC functions in the interest of investors and in
accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations,
1996, the provisions of the Trust Deed and the Offer Documents of the respective
Schemes. At least 2/3rd directors of the Trustee are independent directors who are not
associated with the Sponsor in any manner.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund.
The AMC is required to be approved by the Securities and Exchange Board of India
(SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the
directors of the AMC are independent directors who are not associated with the Sponsor
in any manner. The AMC must have a net worth of at least 10 crore at all times.

Registrar and Transfer Agent

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent
to the Mutual Fund. The Registrar processes the application form, redemption requests
and dispatches account statements to the unit holders. The Registrar and Transfer agent
also handles communications with investors and updates investor records.

Custodian
A custodian is an agent, bank, trust company, or other organization which holds and
safeguards an individual's, mutual fund's, or investment company's assets for them.

25
 Ch. 4- Fund Management Style & Structuring of Portfolio

Factors affecting Management style of a scheme

It’s one thing to understand mutual funds and their working; it’s another to ride on this
potent investment vehicle to create wealth in tune with your risk profile and investment
needs. Here are seven factors that go a long way in helping an AMC meet its investor’s
investment objectives. The factors listed below evaluate factors affecting the
management style of a mutual fund scheme.
 Knowing the profile
Investor’s investments reflect his risk-taking capacity. Equity funds might lure when
the market is rising and peers are making money, but if you are not cut out for the risk
that accompanies it, don’t bite the bait. So, check if the investor’s objective matches
yours. Investors will invest only after they have found their match. If they are racked
by uncertainty, they seek expert advice from a qualified financial advisor.
 Identifying the investment horizon
How long on an average does the investor want to stay invested in a fund is as
important as deciding upon your risk profile. Investors would invest in an equity fund
only if they are willing to stay on for at least two years. For income and gilt funds,
have a one-year perspective at least. Anything less than one year, the only option
among mutual funds is liquid funds.
 Declare and Inform
Watch what you commit. Investors look out for the Offer Document and Hey
Information Memorandum (KIM) before they commit their money to a fund. The
offer document contains essential details pertaining to the fund, including the
summary information (type of scheme, name of the asset management company and
price of units, among other things), investment objectives and investment procedure,
financial information and risk factors.
 The fund fact sheet
Fund fact sheets give investors valuable information of how the fund has performed
in the past. It gives investors access to the fund’s portfolio, its diversification levels

26
 and its performance in the past. The more fact sheets they examine, the better is their
comfort level.
 Diversification across fund houses
If Investors are routing a substantial sum through mutual funds, they would diversify
across fund houses. That way, they spread their risk.
 Chasing incentives
Some financial intermediaries give upfront incentives, in the form of a percentage of
the investor’s initial investment, to invest in a particular fund. Many amateur
investors get lured into such incentives and invest in such attractive schemes, which
may not meet their future expectations. The ideal investor’s focus would be to find a
fund that matches his investment needs and risk profile, and is a performer.
 Tracking investments
The investor’s job doesn’t end at the point of making the investment. They do track
your investment on a regular basis, be it in an equity, debt or balanced fund.

Portfolio management is an important foundation of mutual fund business. The

performance of the fund measured by the risk adjusted returns produced by the investor
arises largely by successful portfolio management function. After collecting the
investors’ funds, effective portfolio management will have to give returns acceptable to
the investor; else, the investor may move to better performing funds.

From the investors’ perspective, the need for successful portfolio management function is
obviously paramount. However, in the complex world of financial markets, portfolio
management is a ‘specialist’ function.

Now how a fund manager manages the portfolio would depend on the type of the fund he
is managing. The funds can be broadly classified as equity funds and debt funds.

27
Equity Portfolio Management:

When the fund contains more than 65% equity, it is called as an equity fund. Thus such
type of a fund would need equity portfolio management.
An equity portfolio manager’s task consists of two major steps:
a) Constructing a portfolio of equity shares or equity linked instruments that is
consistent with the investment objective of the fund and
b) Managing or constantly re-balancing the portfolio to produce capital appreciation
and earnings that would reward the investors with superior returns.

How To Identify Which Kind Of Stocks To Include?

The equity portfolio manager has available to him a whole universe of equity shares and
other instruments such as preference shares, warrants or convertible debentures issued by
many companies. Even within each category of equity instruments, shares of one
company may be very different in terms of their potential than shares of other companies.
So how does the fund manager go about choosing the different types of stocks, in order to
construct his portfolio? The general answer is that his choice of shares to be included in
fund’s portfolio must reflect the investment objective of the fund. more specifically, the
equity portfolio manager will choose from a universe of invisible shares in accordance
with:
a) The nature of the equity instrument, or a stock’s unique characteristics, and
b) A certain ‘investment style’ or philosophy in the process of choosing.
Thus, you may see a mutual fund’s equity portfolio include shares of diverse companies.
However, in reality, the group of stocks selected will have certain unique characteristics,
chosen in accordance with the preferred investment style, such that the portfolio as a
whole is consistent with the scheme’s objectives.

Indian economy is going through a period of both rapid growth and rapid transformation.
Thus, the industries with the growth prospects or blue chip shares of yesterday are no
longer certain to continue to be in that category tomorrow. “New” sectors like software or

28
technology stocks have matured and newer sectors such as biotechnology are now
making an entry in the investment markets. In this process of rapid change, the stock
selection task of an active fund manager in India is by no means simple or limited. We
will therefore, review how different stocks are classified according to their
characteristics.

Ordinary shares:
Ordinary shareholders are the owners if the company and each share entitles the holder to
ownership privileges such as dividends declared by the company and voting rights at the
meetings. Losses as well as the profits are shared by the equity shareholders. Without any
guaranteed income or security, equity share are a risk investment, bringing with them the
potential for capital appreciation in return for the additional risk that the investor
undertakes.

Preference Shares:
Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates
subject to availability of profits after tax. If preference shares are cumulative, unpaid
dividends for years of inadequate profits are paid in subsequent years. Preference shares
do not entitle the holder to ownership privileges such as voting rights at the meetings.

Equity Warrants:
These are long term rights that offer holders the right to purchase equity shares in a
company at a fixed price (usually higher than the current market price) within specified
period. Warrants are in the nature of options on stocks.

Convertible Debentures:
As the term suggests, these are fixed rate debt instruments that are converted into
specified number of equity shares at the end of the specified period. Clearly, convertible
debentures are debt instruments until converted; when converted, they become equity
shares.

29
EQUITY CLASSES:
Equity shares are generally classified on the basis of either the market capitalization or
the anticipated movement of company earnings. it is imperative for the fund manager to
understand these elements of the stocks before he selects them for inclusion in the
portfolio.
a) Classification in terms of Market Capitalization
Market Capitalization is equivalent to the current value of a company, i.e., current
market price per share times the number of outstanding shares. There are Large
Capitalization Companies, Mid – Cap Companies and Small – Cap Companies.
Different schemes of a fund may define their fund objective as a preference for the
Large or Mid or the Small Cap Companies’ shares. For example, the tax plan of
ICICI Prudential AMC is essentially a mid-cap fund where as the tax plan of Reliance
is large-cap fund. Large Cap shares are more liquid and hence easily tradable. Mid or
Small Cap shares may be thought of as having greater growth potential. The stock
markets generally have different indices available to track these different classes of
shares.
b) Classification in terms of Anticipated Earnings
In terms of anticipated earnings of the companies, shares are generally classified on
the basis of their market price relation to one of the following measures:
 Price/Earning Ratio is the price of the share divided by the earnings per share
and indicated what the investors are willing to pay for the company’s earning
potential. Young and fast growing companies usually have high P/E ratios and
the established companies in the mature industries may have lower P/E ratios.
 Dividend Yield for a stock is the ratio of dividend paid per share to the current
market price. In India, at least in the past, investors have indicated the
preference for the high dividend paying shares. What matters to the fund
managers is the potential dividend yields based on earning prospects.
 Cyclical Stocks are the shares of companies whose earnings are correlated with
the state of the economy.

30
  Growth Stocks are shares of companies whose earnings are expected to
increase at the rates that exceed the normal market levels.
 Value Stocks are share of companies in mature industries and are expected to
yield low growth in earnings. these companies may, however, have assets
whose values have not been recognized by investors in general. funds manager
may try to identify such currently undervalued stocks that in their opinion can
yield superior returns later.

Approaches to Portfolio Management (Fund Management Style):

Mutual funds can be broadly classified into two categories in terms of the fund
management style i.e. actively managed funds and passively managed funds (popularly
referred to as index funds).
Actively managed funds are the ones wherein the fund manager uses his skills and
expertise to select invest-worthy stocks from across sectors and market segments. The
sole intention of actively managed funds is to identify various investment opportunities in
the market in order to clock superior returns, and in the process outperform the
designated benchmark index. in active fund management two basic fund management
styles that are prevalent are:
i) Growth Investment Style: wherein the primary objective of equity
investment is to obtain capital appreciation. this investment style would make
the funds manager pick and choose those shares for investment whose
earnings are expected to increase at the rates that exceed the normal market
levels. they tend to reinvest their earnings and generally have high P/E ratios
and low Dividend Yield ratio.
ii) Value Investment Style: wherein the funds manager looks to buy shares of
those companies which he believes are currently under valued in the market,
but whose worth he estimates will be recognized in the market valuation
eventually.

31
On the contrary, passively managed funds/index funds are aligned to a particular
benchmark index like the S&P CNX Nifty or the BSE Sensex. The endeavor of these
funds is to mirror the performance of the designated benchmark index, by investing only
in the stocks of the index with the corresponding allocation or weightage.

Investing in index funds is less cumbersome as compared to investing in actively

managed funds. Broadly speaking, investors need to consider two important aspects i.e.
the expense ratio and the tracking error (i.e. the difference between the returns clocked by
the designated index and index fund).
Conversely, investing in actively managed funds demands a deeper review and
understanding of the fund house's investment philosophy; also the investor needs to
decide on the kind of funds he wishes to invest in - a large cap/mid cap/small cap fund
among others.

In the Indian context, the mutual fund industry is dominated by actively managed funds;
index funds occupy a smaller share of the market. Well-managed actively managed funds
have been successful in outperforming index funds by a huge margin.
This could be attributed to the fact that the Indian markets are still in an evolutionary
phase and there exist a number of inefficiencies. These inefficiencies are in turn utilized
by competent fund managers to outperform the index. This explains why many actively
managed funds manage to outperform the index over the long-term (3-5 years).
A study was conducted wherein category averages of index funds (passive funds) were
compared with those of diversified equity funds (active funds), over varied time frames.
The active-passive tradeoff
Categories Average category returns

1-Yr (%) 3-Yr (%) 5-Yr (%)

Index funds 40.75 32.91 32.38

Actively managed funds 29.05 38.37 41.05

S&P CNX Nifty 39.50 30.96 30.32

32
 BSE Sensex 44.91 35.22 33.20

(Source: Credence Analytics. NAV data as on February 8, 2007. Growth over 1-Yr
is compounded annualised)

The results are quite interesting. Over the 1-Yr time frame, index funds (40.75 per cent)
aligned to the BSE Sensex have comfortably outscored diversified equity funds (29.05
per cent). However over longer time frames (3-Yr and 5-Yr), diversified equity funds
have stolen the march over index funds powered by a strong showing. Over 3-Yr,
diversified equity funds (38.37 per cent CAGR) have outperformed index funds (32.91
per cent CAGR). The degree of outperformance further widens over 5-Yr; diversified
equity funds (41.05 per cent CAGR) fare better than index funds (32.38 per cent).
In a nutshell, in the Indian context, index funds have proven their mettle over shorter time
frames. It's the opposite over longer time frames (3-5 years), where actively managed
funds rule the roost.
However the same should not be seen as a blanket recommendation for actively managed
funds. Not all actively managed funds are invest-worthy and capable of generating
superior returns vis-à-vis benchmark indices (passively managed funds).

Use of Equity Derivatives for Portfolio Risk Management:

An equity portfolio manager is always exposed to the risk that market prices of equities
will decline, causing his fund NAV to drop. Until recently, a fund manager in India had
no option but to sell his stocks, if he expected a fall in market prices. Since the year 2000,
however, equity portfolio managers have instruments available to them, which permit
them to reduce the loss in portfolio value, without selling the stocks in the cash markets.

Equity Derivatives instruments are specially designed contracts that are traded separately
on an exchange, but derive their value from the underlying equity asset. such derivative
contract may be based on individual share/scrips, or on a given market index. the two
basic types of exchange traded derivative instruments are Futures and Options. a

33
futures contract allows one to buy or sell the underlying asset at a specified future date,
but being a traded instrument, the contract can be liquidated without reaching its maturity
date and so without taking or giving delivery of the underlying asset.
Options contracts are available on both the market index and the individual shares. a
futures contracts is an outright purchase for a future date, whereas an options contract
gives its holder the right to buy or sell the Nifty or Sensex index or the individual scrip
for a future delivery at a certain strike price, but are not obliged to exercise that option, if
the price does not move in the direction you expected. you would pay a premium for the
acquisition of this right.

How does a fund manager use these futures and options contracts as a risk management
instruments?
Broadly, if a funds manager holds an equity portfolio and expects the market to decline,
he can sell the index futures at the current price for future delivery. if the market did
decline, his equity portfolio value will come down, but his futures contract will show
corresponding profit, since he had sold it at the higher past price. this is called “hedging”
portfolio risk. in this case, the fund manager would not have any loss due to market
decline. however, contrary to the expectations, if the market prices actually rose, our fund
manager will not gain. the rise in his equity portfolio value will be neutralized by the loss
on his futures position, since he had sold futures at lower price relative to the current
market levels.

Options, too, can be used to hedge an investment portfolio – by buying put options (or
options to sell underlying asset) at a price (the premium). The funds manager can
exercise the option only if the prices fall, since he has the right to sell at a higher price. he
can forgo the premium and not exercise the option, if the prices actually rise. This way he
can still let his portfolio NAV, while protecting the downside risk.

34
Successful Equity Portfolio Management:

Portfolio Management skills are innate in nature and strong intuitive traits from the
portfolio manager. Nevertheless, there are certain principles of good equity management
that any portfolio manager can follow to improve his performance.
 Set realistic target returns based on appropriate benchmarks.

 Be aware of the level of flexibility available while managing the portfolio.

 Decide on appropriate investment philosophy, i.e., whether to capitalize on

economic cycles, or to focus on the growth sectors or finding the value stocks.

 Develop an investment strategy based on the investment objective, the time frame
for the investment and economic expectations over this period.
 Avoid over – diversification. although diversification is a major strength of
mutual funds, the portfolio manager must avoid the temptation to invest into very
large number of securities so as to maintain focus and facilitate sound tracking.

 Develop a flexible approach to investing. Markets are dynamic and it is

impossible to buy ‘stocks for all seasons’

Debt Portfolio Management:

Debt portfolio management has to contend with the construction and management of
portfolio of debt instruments, with the primary objective of generating income. Just as the
equity fund manager has to identify suitable stocks from a larger universe of equity
shares, a debt fund manager has to select from a whole universe of debt securities he
wants to invest in.

35
Debt schemes of a mutual fund have a short maturity period, generally up to one year.
nevertheless, some schemes regarded as debt schemes do have maturity period a little
longer than a year, say, eighteen months. thus in the context of “debt” mutual funds,
depending upon the maturity period of the scheme, the funds managers invest more in
“market-traded instruments” or the “debt securities”. the difference in market-traded
instruments and debt securities is that the former matures before one year and the later
after a year.

Instruments in Indian Debt Market:

the objective of a debt fund is to provide investors with a stable income stream. hence, a
debt fund invests mainly in instruments that yield a fixed rate of return and where the
principal is secure. the debt market in india offers the following instruments for
investment by mutual funds.

Certificate of Deposit:
Certificate of Deposits (CD) are issued by scheduled commercial banks excluding
regional rural banks. these are unsecured negotiable promissory notes. bank CDs have a
maturity period of 91 days to one year, while those issued by financial institutions have
maturities between one and three years.

Commercial Paper:
Commercial Paper (CP) is a short term, unsecured instrument issued by corporate bodies
(public and private) to meet short term working capital needs. maturity varies between 3
months and 1 year. this instrument can be issued to the individuals, banks, companies and
other corporate bodies registered or incorporated in India. CPs can be issued to NRIs on
non – repatriable and non – transferable basis.

Corporate Debentures:

36
Debentures are issued by manufacturing companies with physical assets, as secured
instruments, in the form of certificates. they are assigned credit rating by the rating
agencies. all publicly issued debentures are listed on the exchanges.

Floating Rate Bond (FRB):

these are short to medium term interest bearing instruments issued by financial
intermediaries and corporations. the typical maturity is of these bonds is 3 to 5 years.
FRBs issued by the financial institutions are generally unsecured while those form private
corporations are secured.

Government Securities:
these are medium to long term interest – bearing obligations issued through the RBI by
the Government of India and state governments.

Treasury Bills.
T-bills are short term obligations issued through the RBI by the Government of India at a
discount. the RBI issues T-bills for tenures: now 91 days and 364 days. these treasury
bills are issued through an auction procedure. the yield is determined on the basis of bids
tendered and accepted.

Public Sector Undertakings (PSU) Bonds:

PSU are medium and long term obligations issued by public sector companies in which
the government share holding is generally greater than 51%. some PSU Bonds carry tax
exemptions. the minimum maturity is 5 years for taxable bonds and 7 years for tax-free
bonds. PSU bonds are generally not guaranteed by the government and are in the form of
promissory notes transferable by endorsement and delivery.

Debt Investment Strategies – An Aid for Debt Portfolio Management:

let us have a look at some debt investment strategies adopted by the debt portfolio
managers.

37
Buy and Hold:
historically, in India, UTI and many of the other mutual funds tended to invest in high
yielding debt securities that gave adequate returns on the overall portfolio. the returns are
considered sufficient to reward the investors. Therefore, the funds would just encash the
coupons and hold the bonds until maturity. these fund managers will tend to avoid bond
with call provisions, to counter the prepayment risk.
it has to be understood the strategy holds good as long as the general interest rate level
are stable. if yields rise, the price of bonds will fall. hence, while the fund may generate
sufficient current income according to original target, it will incur a capital loss on its
portfolio as and when revalued to current market price. another risk on the portfolio,
particularly if its maturities are long, is the risk of default by the issuer.

Duration Management:
if Buy and Hold is like Passive Fund Management, Duration Management is like Active
Fund Management. this strategy involves altering the average duration of bonds in a
portfolio depending upon the fund manager’s expectations regarding the direction of
interest rates. if bond yields are expected to fall, the fund manager would buy the bonds
with longer duration and sell bonds with shorter duration, until the fund’s average
duration becomes longer than the market’s average duration. based as the strategy is on
interest rate anticipations, it is akin to the Market Timing Strategy for equity investments.

Credit Selection:
some debt managers look to investing in a bond in anticipation of changes on ots credit
rating. an upgrade of a bond’s credit rating would lend to increase in its price, thereby
leading to a superior return. the fund would need to analyze the bond’s credit quality so
as to implement this strategy. usually, debt funds will specify the proportion of assets
they will hold in instruments of different credit quality/ratings, and hold these
proportions. active credit selection strategy would imply frequent trading of bonds in
anticipation of changes in ratings. while being an active risk management strategy, it

38
does not take away the interest rate, prepayment or credit risks that are faced by any debt
fund.

Prepayment Prediction:
As noted earlier some bonds allow the issuers the option to call for redemption before
maturity. a fund which holds bonds with this provision is exposed to the risk of high
yielding bonds being called back before maturity when interest rates decline. the fund
manager would therefore strive to hold bonds with low prepayment risk relative to yield
spread. or try to predict the course of the interest rates and decide what the prepayment is
likely to be, and then increase or decrease his exposure. in any case, the risks faced by
such fund managers are the same as any other. what matters at the end is the yield
performance obtained by the fund manager.

Interest Rates and Debt Portfolio Management:

no matter which investment stragtegy is followed by a debt fund manager, debt securities
are always exposed to interest rate risk, as their price is directly dependent on them. while
they may yield fixed rates of returns, their market values are dependent on interest rate
movements, which in turn affect the performance of fund portfolio of which they are a
part. hence, it is essential to understand the factors that affect the interest rates. while this
is an intricate subject in itself, we have summarized below some key elements that have a
bearing on interest rate movements:

Inflation: simply put, inflation is the percentage by which prices of goods and services in
the economy increase over a period of time. this increase may be on account of factors
arising within the country – change in production levels, mechanisms for distribution of
goods, etc, and/or on account of changes in the country’s external balance of payments
position. in india , inflation is generally measured by the Wholesale Price Index although
t he Consumer Price Index is also tracked. when the inflation rate rises, money becomes
dearer, leading to an increase in the general level of interest rates.

39
Exchange Rate: a key factor in determining exchange rates between any two currencies
is their relative purchasing power. Over a period, the relative purchasing power between
two currencies may change based on the performance of the respective economies. the
consequent change in exchange rates can affect interest rate levels in the country.

Policies of the Central Bank: the central bank is the apex authority for regulation of the
monetary system in a country. in India, this role is played by the Reserve Bank. the RBI’s
policies have a strong bearing on interest rate levels in the economy. if the RBI wishes to
curb excess liquidity in a monetary system, it could impose a higher liquidity ratio on
banks and institutions. This would restrict credit leading to an increase in interest rates.
Similarly, and increase in RBI’s bank rate has the effect of increasing interest rate levels.
RBI may also undertake open operations in Treasury Bills and Government securities
with the intention of restricting / relaxing liquidity, thereby impacting the interest rates.

Use of Derivatives for Debt Portfolio Management:

as explained above, a debt portfolio is always exposed to the interest rate risk. hence,
derivatives contracts can be used to reduce or alter the risk profile of the portfolios
containing debt instruments. interest rate derivatives contracts can be exchange traded or
privately traded (on the OTC market). thus, a portfolio manager can sell interest rate
futures or buy interest rate ‘put’ options, usually on an exchange, to protect the value of
his debt portfolio. he can also buy or sell forward contracts or swaps bilaterally with other
market players on OTC market.
in india, interest rate swaps and forward rate agreements were introduced in 1999, though
the market for these contracts has not yet fully developed. in 2004, the National Stock
Exchange has introduced futures on Interest Rates. interest rate options are not yet
available for trading on exchange.

40
 Ch. 5- Individual Scheme Analysis

Section I- Thematic Funds- Infrastructure

Mutual funds constantly come out with different schemes. Infrastructure funds are
part of a mutual fund category called thematic funds. While sectoral funds invest in
particular sectors like, say, information technology, power, metals, oil and gas, etc,
thematic funds invests in themes like infrastructure, consumption-led categories like the
retail industry and outsourcing companies. India needs to invest large amounts in areas
like Roads, Ports, Power, and Telecom etc. to sustain high economic growth. Apart from
government spending, it will also require private participation to make significant
progress on developing infrastructure. New initiatives such as Public-Private
participation, increase in FDI limits and adequate funding support from the government
have provided a tremendous boost to the system and therefore companies engaged in this
sector have delivered robust performance in the last couple of years. Today, there is a
huge buzz about the Great Indian Gold Rush and its three themes -- infrastructure,
consumption and outsourcing. Of these three, infrastructure funds have caught the fancy
of a lot of mutual funds; many new funds have been launched in this category in the last
couple of years. Infrastructure, as a theme, covers several sectors like power utilities,
power equipment and construction companies. Unlike technology sector mutual funds (at
best, technology sector funds could buy stocks from telecom and media besides the
software stocks it traditionally invests in), infrastructure funds are not restricted to a few
sectors. We have made an attempt to compare the thematic infrastructure schemes of a
few AMCs.

41
ICICI Prudential Infrastructure Fund

Fund Snapshot:

Structure Open Ended Equity fund

Fund Manager Sankaran Naren
Fund Objective To provide capital appreciation and income
distribution to unit holders by investing
predominantly in equity/equity related securities of
the companies belonging to infrastructure
development and the balance in debt securities and
money market instruments including call money.
Inception Date 31st Aug, 2005
Fund Size Rs. 1,711.81 Crores
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth option : Rs. 19.19

Dividend option : Rs. 14.91

Minimum Investment Rs. 5000
Expense Ratio 1.93%
Benchmark S&P CNX Nifty

42
Style Box:

Portfolio:

Portfolio as on 30th April, 2007

11% 5% 0%4% 12%

1% 0%
3% 9%
2%
6% 2%
7% 14%
6% 2% 2%
5% 9%
Auto Ancillaries Banks
Cement Construction
Dredging Ferrous Metals
Hotels Industrial Capital Goods
Industrial Products Non-Ferrous Metals
Oil Petoleum Products
Power Telecom Services
Transportation CPs & CDs
Term Deposits Cash, Call, CBLO & Reverse Repo

43
 Portfolio as on 30th April, 2007 (% to NAV)
Auto Ancillaries 3.72
Banks 12.32
Cement 0.3
Construction 8.77
Dredging 2.07
Ferrous Metals 13.6
Hotels 2.1
Industrial Capital Goods 9.41
Industrial Products 5.21
Non-Ferrous Metals 1.52
Oil 5.91
Petoleum Products 7.29
Power 5.59
Telecom Services 2.43
Transportation 2.8
CPs & CDs 1.1
Term Deposits 10.67
Cash, Call, CBLO & Reverse Repo 5.12
Other Current Assets 0.07
Total 100

Understanding the portfolio:

The fund is well diversified in both its stock and sectoral exposures. It is a multi-
sector fund and therefore has a much lesser concentration risk than a typical sector fund.
The fund normally holds 35-40 stocks in its portfolio spread across 14-20 sectors, a large
number when compared to most other thematic funds.

Approximately 83% of the funds are invested in equities of infrastructure related

companies. Closely analyzing the equity portfolio, we notice that a considerably high
investment has been made in the banking sector. This points out that the fund manager is
able to recognize the growth potential of the Banking sector in the Indian context. Due to
this, the scheme enjoys the benefits of investing in the booming services sector. The

44
portfolio consists of several well-reputed companies of India viz. Jindal Steel, SAIL, Tata
Steel, BHEL, Reliance Industries, Tata Power, etc. It is noticed that exposure to Auto has
been reduced to zero, as holdings in Ferrous Metals (Sesa Goa) has been replaced with
Tata Steel. The portfolio is skewed towards large cap as the fund seeks to maximize the
risk-return payoff. The Scheme also exhibits term-deposits, CPs & CDs to reputed
organizations like Allahabad Bank, UTI, IDBI etc.

Comparing the Benchmark

The graph below indicates the movement of Rs. 10000 invested at inception vis-à-
vis the benchmark performance.

Performance Record

Our View

45
 The fund largely invests in equities from the infrastructure sector. However, what
distinguishes it from a typical sector fund is its pervasive definition of the infrastructure
sector. The fund house has taken the liberty of including sectors like banking & financial
services among a host of others for defining its area of investment.

The large number of stocks in the portfolio may reduce the fund's vulnerability to
the fluctuations in each of its holdings. However, it may also prevent spectacular
performance from one or two of its stocks from showing up in the performance.

The scheme’s portfolio strategy is governed by its investment objective. In our

opinion, the fund can add value to informed investors who have a view on the
infrastructure sector and a flair for medium to high risk investment avenues.

46
UTI Infrastructure Fund

Fund Snapshot:

Structure Open Ended Equity fund

Fund Manager Sanjay Dongre
Fund Objective To provide Capital appreciation through investing in
the stocks of the companies engaged in the sectors
like Metals, Building materials, oil and gas, power,
chemicals, engineering etc. The fund will invest in
the stocks of the companies which form part of
Infrastructure Industries.
Inception Date 9th March, 2004
Fund Size Rs. 812.19 Crores
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th March, 2007) Growth option : Rs. 25.99

Dividend option : Rs. 18.99

Minimum Investment Rs. 5000
Benchmark BSE 100

Style Box:

47
Portfolio:

Portfolio as on 30th March, 2007 (% to NAV)

Industrial Capital Goods Telecommunications -service

Construction Petroleum Products
Cement Power
Net Current Assets Oil
Ferrous Metals Finance
Industrial Products Consumer Durables
Unclassified Deposit With Bank

Portfolio as on 30th March, 2007 (% to NAV)

Industrial Capital Goods 32.22
Telecommunications -service 11.37
Construction 9.54
Petroleum Products 9.06
Cement 7.56
Power 6.32
Net Current Assets 4.44
Oil 3.74
Ferrous Metals 2.85
Finance 2.62
Industrial Products 2.29
Consumer Durables 2.28
Unclassified 2.17
Deposit With Bank 1.09
Auto And Ancillaries 0.95

48
Consumer Non Durables 0.83
Chemicals 0.51
Non-ferrous Metals 0.16
Total 100

Understanding the Portfolio

UTI Infrastructure Fund is positioned to follow a top down approach keeping in

mind the economic scenario. The fund’s endeavour is to pick sectors, which are expected
to perform better and select fundamentally strong companies in those sectors. The
scheme’s performance is highly linked with the overall economic growth of the country
as the sectors in which the scheme invests are directly linked to the GDP growth of India.

The fund has invested almost 93% of its corpus in Equities. Due to this, the risk in
such a scheme may be perceived as higher. The Fund portfolio reveals heavy investment
in Basic/Engineering sector, closely followed by communication sector. Further, it has a
relatively very low investment in the rapidly growing Auto Ancillaries sector.

Comparing the Benchmark:

Our View:

The

49
scheme has invested in equities of on 20-25 companies. This indicates higher exposure to
company-specific risk. The scheme’s performance is highly linked with the overall
economic growth of the country as the sectors in which the scheme invests are directly
linked to the GDP growth of India.

During the month of March 2007, the fund has under performed its benchmark
index BSE 100. The ongoing monetary tightening in the economy has negative impact on
sector, which has resulted in the underperformance. Although, Engineering &
Construction companies are likely to show strong quarterly numbers as well as strong
order book position, which are more than 2-3 times of yearly revenues in coming
quarters.

50
DSP Merrill Lynch T.I.G.E.R

Fund Snapshot:

Structure Open Ended Equity fund

Fund Manager Soumendra Nath Lahiri
Fund Objective An open ended diversified equity Scheme, seeking to
generate capital appreciation, from a portfolio that is
substantially constituted of equity securities and equity
related securities of corporates, which could benefit
from structural changes brought about by continuing
liberalization in economic policies by the Government
and/or from continuing investments in infrastructure,
both by the public and private sector
Inception Date 27th April, 2004
Fund Size Rs. 1499.86 Crores
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth - Rs. 34.1240

Dividend - Rs. 19.311

Minimum Investment Rs. 5000
Benchmark BSE 100

Style Box:

51
Portfolio:

Portfolio as on 30th April, 2007

Industrial Capital Goods Construction

Petroleum Products Banks
Power Media & Entertainment
Telecom Services Ferrous Metals
Finance Transportation
Industrial Products Oil

Portfolio as on 30th April, 2007

Industrial Capital Goods 20.11
Construction 8.9
Petroleum Products 7.83
Banks 7.63
Power 7.22
Media & Entertainment 6.97
Telecom Services 6.47
Ferrous Metals 5.74
Finance 4.67
Transportation 3.94
Industrial Products 3.66
Oil 3.38
Cement 2.73
Pharmaceuticals 2.57
Retailing 1.65
Engineering 0.72

52
Textiles & Textile Products 0.95
Non-Ferrous Metals 0.45
Consumer Durables 0.42
Debt Instruments 2.51
Cash & Cash Equivalents 1.48
Total 100

Understanding the Portfolio:

DSP T.I.G.E.R. Fund was launched at a very opportune time when the Sensex
was around 7,500 and the India economy had begun to witness high growth. DSP India
T.I.G.E.R. Fund is aimed at benefiting from the exponential growth that India is likely to
witness in the coming decade. The Scheme began with a decent corpus of around Rs 200
crores and has been able to accumulate Rs 1,007 crores as of May 2006. DSP India
T.I.G.E.R. is the first fund of its kind that covers infrastructral areas, giving the common
investor a chance to make the most of the ongoing economic reforms. The Fund House is
very bullish on the Indian Economy and believes that the improved GDP growth in the
future shall strengthen the markets further, on the back of continuing economic reforms.

Better market capitalisation will result from unlocking as well as creation of

value, which the Fund aims at capturing. The fund has a well-diversified portfolio,
consisting of about 61 stocks. Capital goods stocks, on an average, accounted for 23 per
cent of the portfolio the past year and the top three sectors cornered 40 per cent of the
assets. The fund reduced exposure to the cement sector earlier this year, pruning holdings
from 13 per cent to 4.5 per cent. This strategy helped it contain losses during the post-
Budget correction.

Comparing the Benchmark

53
 The scheme has generated an annualised return of 53 per cent since inception and
has outpaced its benchmark, the BSE 100, by 12 percentage points during the same
period.

Our View:

DSPML T.I.G.E.R's. NAV has grown 18 per cent for the past year and outpaced
its benchmark BSE-100 by 3 percentage points. However, it has trailed the ICICI Pru
Infrastructure Fund. In the same period, it outperformed peers such as Tata Infrastructure
and Birla Infrastructure Fund. The fund's performance has, however, been relatively
consistent, trailing the benchmark in just seven of the past 24 months on a monthly return
basis. Though impacted by the mid-cap meltdown in May, it staged a recovery
subsequently.

However, the T.I.G.E.R Fund has a relatively diversified portfolio and thus carries
a moderate risk profile. Investors also have to keep in mind that infrastructure theme
funds usually have an exposure of 30-40 per cent to mid-cap stocks (market capitalisation
less than Rs 5,000 crore), leading to a higher risk profile. Concentrated bets on sectors
such as capital goods also add to the fund's risk level. Hence, risk-averse investors may
find diversified funds a better alternative.

54
Caninfrastructure

Fund Snapshot:

Structure Open Ended Equity fund

Fund Manager Umesh Kamath
Fund Objective To generate income / capital appreciation by investing
in equities and equity related instruments of companies
in the infrastructure sector.
Inception Date 11th September, 2005
Fund Size Rs. 81.5677
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth - Rs. 15.05

Dividend - Rs. 12.86

Minimum Investment Rs. 5000
Benchmark BSE 100

Portfolio:

Portfolio as on 31st May, 2007

2% 9% 2% 21%
2%
5%
7%

15% 21%
16%
Construction Basic/Engineering
Energy Diversified
Technology Metal & Metal Products
Chemicals Services
Cash & Cash Equivalents T-Bills

55
Portfolio as on 31st May, 2007
Construction 21.29
Basic/Engineering 20.88
Energy 16.01
Diversified 14.71
Technology 7.11
Metal & Metal Products 4.77
Chemicals 2.17
Services 2.12
Cash & Cash Equivalents 8.51
T-Bills 2.44
Total 100

56
A Comparative Study

ICICI Prudential:
Prudential ICICI Asset Management Company Limited is an investment
management company and a 55:45 joint venture between Prudential Corporation plc, UK,
and ICICI Ltd., India. Both companies are financial giants, and each is a major player in
its field. Prudential Corporation plc, UK was incorporated in 1848, as a provider of
insurance products. Through its investments, it controls approximately 4% of all the
listed shares on the second largest stock exchange in the world, the London Stock
Exchange, making it one of the largest institutional investors in the UK. ICICI Ltd. was
established in 1955 by the World Bank, the Government of India and representatives of
Indian industry, to promote the industrial development of India by providing project and
corporate finance to Indian industry.Prudential ICICI Asset Management Company
Limited has been incorporated with a capital of Rs 65 crore. This investment - way above
the stipulated norm of Rs 10 crore, represents a strategic long-term commitment, on the
part of both partners, to the rapidly expanding financial services sector in India. In a short
span of 14 months, Prudential ICICIs product portfolio has grown from 2 closed ended
funds to 8 open ended funds and 2 closed ended funds.

UTI
UTI Mutual Fund is managed by UTI Asset Management Company Private
Limited (Estb: Jan 14, 2003) who has been appointed by the UTI Trustee Company
Private Limited for managing the schemes of UTI Mutual Fund and the schemes
transferred / migrated from UTI Mutual Fund. UTI AMC is a registered portfolio
manager under the SEBI (Portfolio Managers) Regulations, 1993 on February 3 2004, for
undertaking portfolio management services and also acts as the manager and marketer to
offshore funds through its 100 % subsidiary, UTI International Limited, registered in
Guernsey, Channel Islands. UTI Mutual Fund has come into existence with effect from
1st February 2003. UTI Asset Management Company presently manages a corpus of over
Rs. 34500 Crore. The fund managers are also ably supported with a strong in-house

57
equity research department. To ensure better management of funds, a risk management
department is also in operation.

DSP Merrill Lynch

DSP Merrill Lynch Asset Management (India) Ltd., has been set up by DSPML
and MLAM, to act as the Asset Management Company (AMC) to the Fund. The AMC
has been appointed as the Investment Manager to the fund, MLAM holds 40% of the paid
up share capital of the AMC, while the balance 60% (approximately), is held by DSPML.
DSP Merrill Lynch, originally called DSP Financial Consultants Ltd., traces its origins to
DS Purbhoodas & Co., a securities and brokerage firm with over 130 years of experience
in the Indian market. After a decade long association, DSP Merrill Lynch & Co. Inc. took
up a 40% stake in DSPFC and the name was changed to DSPML Ltd. DSPML is a full
fledged financial services organization with a broad employee base and offices in
Mumbai, New Delhi, Calcutta, Chennai, Bangalore, Hyderabad and Cochin. MLAM is a
unit of Merrill Lynch Asset Management Group, the money management arm of ML &
Co. It is based in Princenton, N.J., USA and offers a wide range of investment products
in virtually all U.S. domestic and international asset classes and in major capital markets
of the world. Merrill Lynch Investment Managers investment philosophy is designed to
seek consistent, long-term strategic performance results. Its disciplined value oriented
approach to managing its clients portfolios has been with the primary objective of
seeking consistent returns over a long period. The name of DSP Merrill Lynch Asset
Management (India) Ltd. has been changed to DSP Merrill Lynch Investment Managers
Ltd. w.e.f 20th July, 2000.

Canbank Mutual:
Canbank Investment Management Services Ltd., a wholly owned subsidiary of
Canara Bank, has been set up as per the Securities and Exchange Board of India (Mutual
Funds) Regulations, 1933. Investment Management Agreement has been signed between
Canbank Mutual Fund and the Investment Manager, whereby the Investment Manager is
empowered to manage the affairs of Canbank Mutual Fund and operate its various

58
Schemes. The sponsor-Canara Bank, is a leading Nationalised Bank operating in India
and abroad, through its network of branches in India and offices in London, Moscow,
UAE and Hong Kong. Canbank Mutual Fund was one of the pioneers of the Mutual Fund
Movement in India. Canbank Mutual Fund has launched 20 Schemes since its inception.
Of the twenty Schemes, five Schemes have been fully redeemed so for and remaining
fifteen Schemes are being managed by the Investment Manager.

Comparative Performance Study:

Scheme v/s BSE Sensex

Scheme Asset Management Scheme Index Difference

Company Returns Returns
CanInfrastructure Canbank Mutual Fund 27.39 34.91 -7.52
DSP Merrill Lynch DSP Merrill Lynch 52.35 43.47 8.88
Tiger Fund Mutual Fund
ICICI Prudential ICICI Prudential Mutual 44.56 36.34 8.22
Infrastructure Fund Fund
UTI Infrastructure UTI Mutual Fund 40.02 31.80 8.22
Fund

59
Scheme v/s NSE Nifty

Scheme Asset Management Scheme Index Difference

Company Returns Returns
CanInfrastructure Canbank Mutual Fund 27.39 32.25 -4.86
ICICI Prudential ICICI Prudential Mutual 44.56 33.38 11.18
Infrastructure Fund
Fund

As evident from the performance analysis of the mutual fund schemes in question,
we can clearly see that Caninfrastructure has underperformed when it comes to
comparison with its own benchmark i.e. BSE-100. Moreover, when we compare it with a
common platform using the BSE Sensex or NSE Nifty, too, it has shown a relatively low
performance. Further, from the point of view of investment returns, we hereby observe
that, ICICI Prudential Infrastructure have performed satisfactorily and seem to have
generated returns well above the Exchange indices. If numbers are to be considered,
DSPML T.I.G.E.R shows the highest returns since inception. Thus, from analysis of the
past performance since inception of the schemes in question, we may recommend
DSPML T.I.G.E.R to investors with an expectation that the positive performance will be
maintained even in future by the fund scheme.

Section II- Index Funds

In India, we are used to the concept of professional fund management. Today, a host of
mutual funds are available to investors. A unifying feature of all of these funds is that
they are all actively managed funds -- fund managers select a portfolio of stocks so as to
get "high returns".

60
An alternative approach towards fund management exists: that of a fund which is
passively managed. Such funds are called index funds.
An index fund is a fund whose daily returns are the same as the daily returns obtained
from an index. Thus, it is passively managed in the sense that an index fund manager
invests in a portfolio which is exactly the same as the portfolio which makes up an index.
For instance, the NSE-50 index (Nifty) is a market index which is made up of 50
companies. A Nifty index fund has all its money invested in the Nifty fifty companies,
held in the same weights of the companies which are held in the index.
It is hence obvious that an index fund can never "beat the index". On the other hand, it
can also never do worse than the index. This type of fund management leaves no
decisions open, about what companies to hold and how much to invest in each company.
This is contrary to active management, where a good fund manager is considered to be
one who can invests a lot of resources into researching which are the companies to hold
so that the returns on the managed portfolio is more than what the "market" offers.
Thus, index funds explicitly give up the biggest objective of every active fund manager,
which is that of "beating the market". This sounds completely unlike the efforts of all
fund managers in the country. Why would it be a good idea?
1. The simplest fact is that beating the market is hard. Two decades of study of
evaluation of mutual funds suggest that most funds fail to beat the market, on a
risk-adjusted basis. That is, when funds offer high returns, typically they are more
risky than those which offer lower returns. Results of this nature have been
observed in a wide variety of markets, all over the world. In India also, the track
record of funds at outperforming the market is dismal.
2. The behaviour of an actively managed fund fluctuates more than passively
managed index funds. When funds do beat the market, on a risk-adjusted basis, it
is often the case that this owes to good fortune, and the excess returns are not
repeated in following years. The problem of identifying a good fund manager is as
hard as picking good stocks. Matters are made worse by the fact that the
performance of fund managers fluctuates with changes of the management team
that runs a fund changes. The behaviour of the market index, in comparison, is

61
 more predictable -- it has a more reliable risk-return tradeoff. You know more
about what the volatility of Nifty is going to be next month, based on past
experience, as compared with the volatility of a fund NAV (which could change
for a variety of reasons).
3. There is an additional issue of management fees. Active managers incur various
expenses: wages for research and fund management staff, costs of buying data
and computer power, and transactions costs in trading. Ultimately, investors who
buy into these funds are paying these costs. In contrast, Index funds avoid almost
all these costs.
The above set of points seems to suggest a strong case for index funds. But an argument
can be made that different investors have different needs. A young person, at the start of
her career, might be willing to make a more risky investment for higher returns compared
to a retired person, who would not be as willing to accept so much risk in her investment
and would settle for a lower amount of returns. In this case, portfolios need to be tuned to
specific situations. If a rich person can afford to hire a personal fund manager, wouldn't
the personal fund manager do something unique that addresses his needs? In this sense,
don't we need something more than just holding the index?
A well-researched body of financial economics suggest that there are exactly two assets
that are important: the riskless asset (like money in the bank, or government treasury
bills) and the market index. Any investor can choose an acceptable level of return and
risk by mixing these two in varying proportions. Low risk portfolios can be constructed
by putting a smaller fraction of money into the market index. Risk greater than the market
index can be obtained by borrowing at the riskless rate and investing in the market index.
Hence, we only need two funds -- a riskless investment and an index fund -- to take care
of the investment objectives of everyone.
Index funds are available from many investment managers. Some common indices
include the S&P 500, the Wilshire 5000, the FTSE 100 and the FTSE All-Share Index.

62
UTI Master Index Fund

Objective
The fund is an actively managed index fund, and will invest at least 90 per cent of the
funds mobilised in a basket of securities drawn from NSE 50 and BSE 30 indices. Up to
10 per cent of the corpus would be invested in fixed income securities and money market
securities. It was converted in to an open-ended scheme in October 2000. The fund was
earlier known as Index Equity Fund.

Scheme Snapshot
Fund Manager Swati Kulkarni
Scheme Objective Equity
Scheme Sub-Objective Equity-Index
Scheme Type Open
Min. Investment(Rs) 5000
Total Assets(Rs./Mn) 492.87
Registrars UTI Branches
Launch Date 01-JUN-98

Asset Allocation as on 30-Apr-07

Equity Shares 94.26 %
Net Current Assets 5.74 %

Style Box:

63
Returns* (%) 1wk 3 months 6 months 1 year 3 years* Inception
Absolute - 12.89 4.89 49.09 43.53 18.70
2.64
Relative to Sensex 0.84 3.74 2.97 -2.20 9.26 18.70
**
Relative to Nifty ** 0.90 1.41 0.27 -3.06 11.94 18.70

Sector Allocation as on 30-Apr-07

Sector % Of Asset
I T - Software 18.97
Banks 14.62
Petroleum Products 12.27
Telecommunications -service 9.94
Consumer Non Durables 7.24
Industrial Capital Goods 7.24
Auto 5.73
Cement 4.46
Oil 4.41
Finance 4.22
Pharmaceuticals 3.30
Power 3.14
Ferrous Metals 2.52
Non-ferrous Metals 1.43
Net Current Assets 0.50

Our View

64
The fund being an index fund invests only in equities. And as we see the fund style it
shows that the investment style is growth oriented. Thus investors who are capable of
taking moderate level risk are advised to invest in this fund. But we also see that in an
index fund can never do worse than the index. So investors who are ready to take
moderate risk to low level risk can invest in this scheme.

When we try to compare the performance of the fund v/s category average we see that the
fund has outperformed the category average till the month of February. But its
performance is diminishing for the past 3 months. I think one of the prime reasons for
this fall is that around 18.97% of the mobilized funds are invested in IT sector. And from
past few months IT sector is not doing well. The reason being is the appreciation of
Indian rupee against the US dollar.

65
Reliance Index Fund - Sensex Plan
Objective
The objective of the Sensex plan is to replicate the composition of the sensex, with a
view to endeavor to generate returns, which could approximately be the same as that of
Sensex.

Scheme Snapshot
Fund Manager Ashwani Kumar
Scheme Objective Equity
Scheme Sub-Objective Equity-Index
Scheme Type Open
Min. Investment(Rs) 5000
Total Assets(Rs./Mn) 38.5
Registrars Karvy Consultants Limited
Launch Date 29-JAN-05

Asset Allocation as on 30-Apr-07

Particulars Percentage
Equity Shares 98.25
Cash And Other Assets 1.75

NAV Performance (NAV Chart of growth option)

66
Fund Style

Returns* (%) Returns (%)

1wk 3 6 1 3 Inception*
months months year years*
Absolute - 11.91 5.13 43.11 -NM- 36.17
2.68
Relative to Sensex 0.80 2.76 3.21 -8.18 -NM- -1.82
**
Relative to Nifty ** 0.86 0.43 0.51 -9.04 -NM- 1.94

Understanding the fund:

Reliance Index Fund is an open-ended Equity Index Scheme which aims to provide
medium to long-term growth of capital. In comparison to actively managed funds,
Reliance index fund has a lower risk-return profile. Simply put, this fund will not turn in
that high returns as a diversified equity fund would when bulls are on a rampage. At the
same time, it will not be as severely hurt as the diversified equity category when stock
markets tank.
Entry into the fund requires a minimum investment of Rs 5000. The fund is available for
subscription at an entry load of 1%. There is no exit load. The scheme was managing
assets worth Rs 38.5 mn as on April 30, 2007.

Our View

67
The fund being an index fund invests only in equities. And as we see the fund style it
shows that the investment style is growth oriented. Thus investors who are capable of
taking moderate level risk are advised to invest in this fund. But we also see that in an
index fund can never do worse than the index. So investors who are ready to take
moderate risk to low level risk can invest in this scheme.
When we try to compare the performance of the fund v/s category average we see that the
fund has underperformed the category average till the month of February. The ongoing
monetary tightening in the economy has negative impact on the Sensex, which has
resulted in the underperformance.

LICMF Index Fund - Sensex Plan

Objective
An open ended Index linked equity scheme seeking to provide capital growth by
investing in index stocks.

Scheme Snapshot
Fund Manager Nagendra Singh
Scheme Objective Equity
Scheme Sub-Objective Equity-Index
Scheme Type Open
Min. Investment(Rs) 5000
Total Assets(Rs./Mn) 282.81
Registrars Karvy Computershare Ltd
Launch Date 14-NOV-02

Asset Allocation as on 30-Apr-07

68
Particulars Percentage
Equity Shares 97.06
Cash And Other Assets 2.04

Fund style

Returns* (%) Returns (%)

1wk 3 6 1 3 Inception*
months months year years*
Absolute - 9.83 0.70 50.00 35.33 29.32
1.49
Relative to Sensex 0.28 -1.80 -2.15 -4.51 1.91 -8.99
**
Relative to Nifty ** 0.54 -3.05 -5.07 -4.43 4.81 -6.03

Relative Performance (Fund Vs Category Average)

69
Understanding of the fund
LICMF Index Fund is an open-ended Equity Index Scheme which aims to provide
medium to long-term growth of capital. In comparison to actively managed funds,
Reliance index fund has a lower risk-return profile. Simply put, this fund will not turn in
that high returns as a diversified equity fund would when bulls are on a rampage. At the
same time, it will not be as severely hurt as the diversified equity category when stock
markets tank.
Entry into the fund requires a minimum investment of Rs 5000. The fund is available for
subscription at an entry load of 2.25% and exit load of 0%. The scheme was managing
assets worth Rs 282.81mn as on April 30, 2007.

Our View
The fund being an index fund invests only in equities. And as we see the fund style it
shows that the investment style is growth oriented. Thus investors who are capable of
taking risk are advised to invest in this fund. But we also see that in an index fund can
never do worse than the index. So investors who are ready to take moderate risk to high
risk can invest in this scheme.
When we try to compare the performance of the fund v/s category average we see that the
fund is an underperformer. Only in the month of June the fund has outperformed the fund
category. One reason which I would like to cite is that since the entry load is high as
compared to other funds in the same category there is less attractiveness from the
investors.

Comparison of funds
70
Absolute returns
Absolute returns measure how much a fund has gained over a certain period. So you look
at the NAV on one day and look at it, say, six months or one year or two years later. The
percentage difference will tell you the return over this time frame. This measure looks at
the appreciation or depreciation (expressed as a percentage) that an asset - a mutual fund
achieves over a given period of time.
NAV= (Market Value of Equity investments) + (NAV of Equity Mutual Funds) + (Debt
& Fixed Income Securities on face value + accrued interest) + (NAV of Debt Mutual
Funds) + (Cash) + (Balances with Broker) + (Dividend/Interest/any other receivables) –
(Liabilities) – (Accrued Expenses i.e. taxation (NRI)/portfolio management fees, and
other statutory liabilities}
 High Watermarking is arrived at after deducting performance-based fees from the
closing NAV.
 Opening NAV (for purpose of calculating performance based fee) would be
highest of all previous year closing NAV (adjusted for Infusions and
Withdrawals).
 Absolute return is calculated as a difference between Closing NAV and the High
Watermark as at the end of the previous year.
 Return% is computed as a percentage of Absolute returns on the Opening NAV
Scheme LIC MF Index - Sensex Reliance Index-Sensex UTI Master Index
Plan (G) Plan (G) Fund (G)
1 Year 39.3% 37.8% 41.3%

We clearly know the importance of absolute returns in judging the attractiveness of a

fund. The above table states that UTI Master Fund is the best fund amongst the three
when absolute returns are considered. Thus when an investor tries to evaluate the
performance of a fund UTI would be the best fund to invest in.

Expense ratio

71
The expense ratio denotes that percentage of the mutual fund's total net assets/corpus that
goes towards meeting its expenses. These expenses are recurring in nature and must be
differentiated from one-time expenses like loads (on entry and exit). The fund's recurring
expenses that are broadly covered by the expense ratio are fund management fees, the
marketing and selling expenses and registrar fees, among other charges.
All these expenses are borne by the mutual fund. In other words, all these expenses are
deducted from the net assets/corpus of the fund. Since the NAV (net asset value) per unit
is based on the net assets, higher net assets for a given number of units will result in a
higher NAV. Conversely, lower net assets for a given number of units will result in a
lower NAV. Since expenses erode the net assets, one way for a mutual fund to improve
its returns is by keeping expenses on the lower side.
However, investors would do well to understand that this doesn't mean that funds with
lower expense ratios are necessarily better than the funds with higher expense ratios.
Investors should appreciate that the expense ratio is just one parameter amongst many
others, which is used to judge a fund's attractiveness. What a lower expense ratio
effectively does is that it provides investors with a better chance to rake higher returns.

Scheme LIC MF Index - Reliance Index- UTI Master Index

Sensex Plan (G) Sensex Plan (G) Fund (G)
Expense ratio 2.50 1.49 0.75

From the above table we can clearly see that the expense ratio of UTI Master Index Fund
is very low as compared to other two 2 funds. Thus when an investor takes a decision
whether to invest or not to invest in any of the above mentioned funds, the above table
gives a clear picture stating that UTI is the right fund to invest in as far as expense ratio is
concerned.

Load charges

72
Load is the price of buying a unit. An entry load is a charge that may be levied on an
investor when buying the units of a scheme. Typically, the investor pays a ‘premium’
over the NAV of the scheme to account for the entry load, in proportion to the percentage
charged to the investor as an entry load. The entry load percentage is added to the
prevailing NAV at the time of allotment of units. An exit load is a charge that may be
levied on an investor when exiting a scheme. When an exit load applies to redemption
from a scheme, the investor may sell his units back to the fund at a ‘discount’ to the
stated NAV, in proportion to the percentage charged as an exit load. The exit load
percentage is deducted from the NAV at the time of redemption (or transfer between
schemes). This amount goes to the Asset Management Company and not into the pool of
funds of the scheme.
Entry/exit loads and initial issue expenses qualify as one-time charges, as opposed to
recurring expenses. First, let's consider the case of new fund offers (NFOs). Over the last
few years, investors have been faced with a deluge of NFOs. But in recent times, a
perceptible trend in NFOs has been a rise in the number of close-ended funds. This
phenomenon can be traced to the rules governing initial issue expenses. Close-ended
funds are not permitted to charge any entry load; instead 6% of the sum mobilized during
the NFO period can be utilised to meet the initial issue expenses. The same can be
amortised (charged to the fund) over the fund's close-ended tenure.
Conversely, in the case of open-ended NFOs, funds are required to meet all the sales,
marketing and distribution expenses from the entry load. They are not permitted to charge
any initial issue expenses. The rules governing entry/exit loads state that taken together,
the two cannot account for more than 6% of the net asset value (NAV). Charging an entry
load for the entire 6% upfront would adversely affect the fund's performance in the initial
period. Hence AMCs choose to have rather "rational" entry loads in the range of 2.25%-
2.50%. Like initial issue expenses, entry loads also eat into the investor's returns, since
the investor has that much less money working for him.
It is not difficult to understand why AMCs have a newfound liking for close-ended funds.
With the provision for charging 6% of amount mobilized towards initial issue expenses,
AMCs are better equipped to compensate the distributors and agents, who in turn help the

73
fund houses in accumulating more assets. Higher assets translate into higher revenues for
the AMCs. Of course, close-ended funds do offer advantages as well. For example, the
fund manager can make investments from a long-term perspective and investors are given
the opportunity to invest for a pre-defined investment horizon. However, investors would
do well to factor in the costs involved.

Entry Load Entry Load Exit Load

LIC MF Index - Sensex Plan (G) 2.25% 1%

Reliance Index-Sensex Plan (G) 1% 0%
UTI Master Index Fund (G) 0% 1%

In the above table when we compare three different funds on the basis of load charges we
see that Reliance charges an entry load of 1% and 0% exit load while it’s the other way
round for UTI Master Index Fund. UTI charges an entry load of 0% and an exit load of
1%.So then how do we decide which is a better fund. In a fund where there is an entry
load means that you have already paid the charges irrespective of whether you make
profit or loss. While in a fund where there is an exit load you pay the charges only when
you make an exit. Thus you have a chance to earn profits and then pay the load. And
normally an investor would only make an exit when he earns some profit. So I think that
UTI Master Index Fund is a better fund to invest in.

Asset management companies

Jeevan Bima Sahyog AMC Ltd.

Jeevan Bima Sahyog AMC was established in the year 1994 to manage the investments
and operate the schemes of LIC MF.Jeevan Bima Sahyog Asset Management Company
Ltd is a company promoted by Life Insurance Corporation of India with an authorized
capital of Rs.25 crores. The day to day operations of the AMC are looked after by

74
experienced and qualified professionals, consisting of senior officials on deputation from
Life Insurance Corporation of India as well as directly recruited officials of the AMC.

Reliance Capital Asset Management Ltd

Reliance Capital Asset Management Limited (RCAM), a company registered under the
Companies Act, 1956 was appointed to act as the Investment Manager of Reliance
Mutual Fund.RCAM is a wholly owned subsidiary of Reliance Capital Limited, the
sponsor. The entire paid-up capital (100%) of Reliance Capital Asset Management
Limited is held by Reliance Capital Limited.

Reliance Capital Asset Management Limited was approved as the Asset Management
Company for the Mutual Fund by SEBI dated June 30, 1995. The Mutual Fund has
entered into an Investment Management Agreement (IMA) with RCAM dated May 12,
1995 and was amended on August 12, 1997 in line with SEBI (Mutual Funds)
Regulations, 1996. Pursuant to this IMA, RCAM is authorized to act as Investment
Manager of Reliance Mutual Fund. The net worth of the Asset Management Company
including preference shares as on March 31, 2005 is Rs.30.13 crores.

RCAM has been registered as a portfolio manager with SEBI and was renewed effective
1st August, 2003.RCAM has commenced these activities. It has been ensured that key
personnel of the AMC, the systems, back office, bank and securities accounts are
segregated activity wise and there exists systems to prohibit access to inside information
of various activities. As per SEBI Regulations, it will further ensure that AMC meets the
capital adequacy requirements, if any, separately for each such activity.

RCAM has been appointed as the Investment Manager of "Reliance India Power Fund", a
Venture Capital Fund registered with SEBI dated June 16, 2005 but this activity is yet to
commence.

UTI Asset Mgmt Company Pvt. Ltd

75
UTI Asset Management Company Private Limited is a company incorporated under The
Companies Act, 1956. It has been appointed as the Asset Management Company of the
UTI Mutual Fund by the Trustee in terms of Investment Management Agreement dated
December 9, 2002 executed between UTI Trustee Company Private Limited and UTI
Asset Management Company Private Limited. The AMC was approved by SEBI to act as
the asset management company for UTI Mutual Fund dated January 14, 2003. Out of the
AMC's total paid-up capital of Rs.10 crores, 25% is held by each of the Sponsors. The
AMC apart from managing the schemes of UTI Mutual Fund will also manage the
schemes transferred/migrated from UTI MF, in accordance with the provisions of the
Investment Management Agreement, the Trust Deed, the SEBI (Mutual Funds)
Regulations and the objectives of the schemes.

UTI AMC will be entering into a service agreement with the Administrator of the
Specified Undertaking of The Unit Trust of India to provide back office support for
business processes excluding fund management.

UTI AMC has been registered as a portfolio manager under the SEBI (Portfolio
Managers) Regulations, 1993 on February 3 2004, for undertaking portfolio management
services.

UTI International Ltd., a 100 % subsidiary of UTI AMC, registered in Guernsey, Channel
Islands, and acts as manager to offshore funds and markets these offshore funds abroad.

Systems are in place to ensure that bank and securities accounts are segregated and there
is no conflict of interest between the various activities undertaken by UTI AMC.

Investment philosophy
UTI Mutual Fund’s investment philosophy is to deliver consistent and stable returns in
the medium to long term with a fairly lower volatility of fund returns compared to the
broad market. It believes in having a balanced and well-diversified portfolio for all the

76
funds and a rigorous in-house research based approach to all its investments. It is
committed to adopt and maintain good fund management practices and a process based
investment management.
UTI Mutual Fund follows an investment approach of giving as equal an importance to
asset allocation and sectoral allocation, as is given to security selection while managing
any fund. It combines top-down and bottom-up approaches to enable the portfolios/funds
to adapt to different market conditions so as to prevent missing an investment
opportunity.
In terms of its funds performance, UTI Mutual Fund aims to consistently remain in the
top quartile vis-à-vis the funds in the peer group.

NAV growth
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the
Asset Management Company (AMC) at the end of every business day. Net asset value on
a particular date reflects the realisable value that the investor will get for each unit that he
is holding if the scheme is liquidated on that date

NAV per share = Current value of fund holdings / No. of fund shares

Eg: Rs.100, 000 / 3,333 = 30

The NAV is calculated by dividing the current value of the portfolio by the number of
fund shares outstanding. For open-ended mutual funds, new shares are issued as money
flows into the fund. Likewise, the number of shares outstanding is reduced as investments
are redeemed. The NAV increases as the value of the portfolio's holdings increase. For
example, if a share of a stock fund costs Rs.30 today and Rs.18 one year ago, there has
been a gain (or profit) of Rs.12 a share, or about 66%, before fund expenses. The change
in a fund's NAV determines its performance. Comparing NAV performance enables
investors to differentiate funds on a relative basis.

LIC MF Index - Sensex Plan (G)

77
NAV (%) GROWTH
1WEEK 1MONTH 3MONTH 6MONTH 1YEAR

1.00 2.0000 11.00 2.00 46.00

Reliance Index-Sensex Plan (G)

NAV (%) GROWTH
1WEEK 1MONTH 3MONTH 6MONTH 1YEAR

1.00 2.0000 12.00 5.00 45.00

UTI Master Index Fund (G)

NAV (%) GROWTH
1WEEK
1MONTH 3MONTH 6MONTH 1YEAR

1.00 2.0000 13.00 4.00 49.00

In the above three tables we can clearly see the NAV growth of three different schemes
for a period of 1 year. What we understand from the above data is that for the 1st week
and first month the growth of all the 3 schemes is the same. But when we look at the
growth figures for 3 months UTI appears to be a better fund. And then we compare the
figures for a period of 6 months. It shows that Reliance has performed better. Finally
when we compare the NAV growth over a period of 1 year UTI Master Index Fund is the
best performing fund amongst the three.

Comparative Performance Study

Scheme v/s Nifty

Scheme AMC Scheme Index Difference

Returns Returns
LICMF Index Fund – Sensex LIC Mutual Fund 29.36 35.72
Advantage Plan -6.36
UTI Master Index Fund UTI Mutual Fund 18.73 0.00 18.73
Reliance Index Fund – Sensex Reliance Mutual Fund 36.23 34.28 -1.95
Plan

Scheme v/s BSE Sensex

78
 Scheme AMC Scheme Index Difference
Returns Returns
LICMF Index Fund – Sensex LIC Mutual Fund 29.36 38.60 -9.24
Advantage Plan
UTI Master Index Fund UTI Mutual Fund 18.73 0.00 18.73
Reliance Index Fund – Sensex Reliance Mutual 36.23 38.04 -1.81
Plan Fund

As we see from the comparative performance analysis of the mutual fund schemes in the
above tables, we can clearly see that only one fund that has outperformed both the indices
is UTI Master Index Fund. Both the other funds have underperformed in respect to both
the indices. Thus if these numbers are considered, we come down to conclusion stating
that UTI Master Index fund shows the highest returns since inception.

Now when we try to consolidate the outcomes of all the judging parameters, we
recommend UTI Master Index Fund to investors.

79
Section III- Equity Link Savings Scheme

Equity Link Savings Schemes are similar to the normal equity diversified schemes that
invest across the board and market segments. Features that differentiate ELSS from an
open ended equity diversified scheme are tax saving benefit (deduction under Sec 80C)
and a lock in period of three years.

The common retort to the oft-asked question by anxious investors, of the best way to save
tax, is to invest in Post Office savings schemes, or perhaps a regular investment in a
public provident fund, or to buy insurance policies.
It is unfortunate that the greatly advantageous Equity Linked Savings Scheme (ELSS) is
hardly ever mentioned, which is not a surprise, since, even though it is one of the high
yielding products, it remains one of the lesser known ones. That is another reason that
investors do not yet comprehend the potential benefits of this product.

ELSS holds the advantage of being the only equity-based tax saving instrument available
in the country today and offers tax deduction on investments up to Rs 1, 00,000, under
Section 80C of the Income-Tax Act.

Why investing in ELSS?

- Tax Benefit: Upto Rs one lakh under Section 80C.
- Saves from Short Term Volatility: Lock in of three years.
- Better Return than that of other savings instruments and similar to other equity
schemes.

80
ICICI Prudential Taxplan –Growth
Fund Snapshot:

Structure Open Ended Equity Growth fund

Fund Manager Sankaran Naren
Fund Objective The scheme seeks to generate long term capital
appreciation from a portfolio that is invested
predominantly in equity and equity related securities.
Indicative Investment Horizon 5 yrs. & more
Inception Date 9th Aug, 1999
Fund Size Rs. 700.1381 Crores
Face Value (Rs./Unit) Rs. 10
th
NAV (as on 30 April, 2007) Growth option : Rs. 90.26
Minimum Investment Rs. 500
Expense Ratio 2.22%
Benchmark S&P CNX Nifty

Style Box:

Portfolio:

81 Portfolio as on 31st May, 2007

HealthPortfolio
Care as on 31st May, 2007 (% to NAV) 12.94
Technology
FMCG 14.09
10.68

82
Diversified 9.90
Financial Services 8.83
Chemicals 8.39
Services 6.45
Automobile 6.17
Energy 5.96
Textiles 5.32
Basic/Engineering 2.37
Construction 1.99
Metals & Metal Products 1.53
Other Current Assets 5.38
Total 100

Portfolio Characteristics:

Portfolio as on 31st May, 2007

Average Market Cap(Rs Cr) 2895.84
Market Capitalization % of Portfolio
Giant 19.94
Large 2.62
Mid 35.23
Small 40.95
Tiny 0.56

83
Scheme Performance (%) As On 31st May, 2007:
14 days 1 month 3 months 1 year 3 yrs* Inception*
-1.57 2.84 10.88 38.97 53.99 32.55

Understanding the portfolio:

Prudential ICICI Tax Plan continues to be a high-return high-risk game for investors. It
may not go down well with investors who are looking for stability over flashy returns. Its
concentration in small and mid cap stocks is a testimony to this fact. Mid caps and small
caps occupy humungous space in its portfolio, at 35 and 41 per cent, respectively. Large
cap companies have a small presence in its portfolio (2.62 per cent in May, 2007).
The fund is no doubt aggressive but it has been able to justify its strategy through good
returns. The fund is not only aggressive in selecting stocks but also churns its portfolio
very vociferously. It has restricted its portfolio to around 50 stocks. The fund manager
loves to try out stocks but the buy-and-hold strategy does not seem to be his priority.
It paid the price for being too aggressive when the markets went down. After the May
crash, the fund had lost heavily. In the June quarter, the fund had lost 15.75 per cent,
slightly more than the category's loss of 15.35 per cent. Since then, the going has been a
little tough. During the six month period ending January 11, 2007, the fund has delivered
28.65 per cent to under-perform the category's 30.20 per cent returns.
Technology sector remains the top holding of the fund followed by Healthcare,
Diversified and FMCG. Cadila Healthcare is currently its top holding with an over 5 per
cent allocation (as per December 2006 portfolio). Sundaram-Clayton (4.84 per cent),
Kesoram Industries (4.76 per cent) and Trent (4.10 per cent) are the other major holdings.

84
UTI Equity Tax Savings Plan - Growth
Fund Snapshot:
Structure Open Ended Equity Growth fund
Fund Manager Swati Kulkarni
Fund Objective Aims at providing investors the opportunity to
participate in the reasonable growth in the value of
investments in equities and equity - linked securities,
over a period of time, in addition to tax benefits.
Indicative Investment Horizon 5 yrs. & more
Inception Date 15th Dec, 1999
Fund Size Rs. 302.5493 Crores
Face Value (Rs./Unit) Rs. 10
th
NAV (as on 30 April, 2007) Growth option : Rs 30.92
Minimum Investment Rs. 500
Expense Ratio 2.34%
Benchmark BSE 100

Style Box:

85
Portfolio:

Portfolio as on 31st May, 2007

Technology Auto Mobile

Diversified Services
FMCG Textiles
Energy
Basic/Engineering
Financial Services
Metals & related products
Construction
Health Care

Portfolio as on 31st May, 2007 (% to NAV)

Technology
Diversified 19.84
12.24

86
FMCG 9.96
Energy 8.85
Basic/Engineering 8.51
Financial Services 8.41
Metals & Metal Products 6.56
Construction 5.57
Health Care 4.90
Automobile 3.94
Services 2.82
Textiles 1.02
Other Current Assets 7.38

Portfolio Characteristics:

Portfolio as on 31st May, 2007

Average Market Cap(Rs Cr) 14540.42
Market Capitalization % of Portfolio
Giant 52.81
Large 12.97
Mid 17.07
Small 11.87
Tiny 2.97

Scheme Performance (%) As On 8 June, 2007:

14 days 1 month 3 months 1 year 3 yrs* Inception*
-0.77 3.9 11.38 38.53 33.69 19.34

87
Understanding the Portfolio:
UTI Equity Tax Savings Plan continues to be a medium-return high-risk game for
investors. It may not go down well with investors who are looking for stability over
flashy returns. Its concentration in small and mid cap stocks is a testimony to this fact.
Mid caps and small caps occupy humungous space in its portfolio, at 17 and 12 per cent,
respectively. Large cap companies have also small presence in its portfolio (13 per cent
in May, 2007).
Technology sector remains the top holding of the fund followed by Healthcare,
Diversified and FMCG.Bharati Tele Ventures is currently top holding with an over 5 per
cent allocation (as per May 2007 portfolio).Reliance Industry Ltd (4.36 per cent), Satyam
Computer Services Ltd (4.19 per cent),Aditya Birla Nuvo Ltd (4.17 per cent) are other
major holdings.
As per see the portfolio P/E ratio (28.89 per cent) of UTI is better than ICICI Prudential
(18 per cent).

88
Reliance Tax Saver Fund - Growth
Fund Snapshot:
Structure Open Ended Equity Growth fund
Fund Manager Ashwani Kumar
Fund Objective The primary objective of the scheme is to generate
long-term capital appreciation from a portfolio that is
invested predominantly in equity and equity related
instruments.
Indicative Investment Horizon 5 yrs. & more
Inception Date 23rd Aug, 2005
Fund Size Rs. 1703.44 Crores
Face Value (Rs./Unit) Rs. 10
st
NAV (as on 31 May, 2007) Growth option : Rs. 14.52
Minimum Investment Rs. 500
Expense Ratio 1.93%
Benchmark BSE 100
Fund Style Portfolio Characteristics

Style Box:

89
Portfolio:
Portfolio as on 30th April, 2007

Basic Engineering
Auto Mobile Financial Services
Technology FMCG
Construction
Chemicals
Services
Diversified

Portfolio as on 31st May, 2007 (% to NAV)

Basic/Engineering 25.67
Automobile 16.41
Technology 13.51
Construction 11.28
Chemicals 3.47
Services 3.40
Diversified 3.34
Financial Services 3.12
FMCG 1.92
Other Current Assets 17.88
Total 100

90
Portfolio Characteristics:

Portfolio as on 31st May, 2007

Average Market Cap(Rs Cr) 3089.47
Market Capitalization % of Portfolio
Giant 14.58
Large 6.55
Mid 36.16
Small 42.71
Tiny --
Investment Valuation Stock Portfolio
Portfolio P/E Ratio 25.53

Scheme Performance (%) As On 31st May, 2007:

14 days 1 month 3 months 1 year 3 yrs* Inception*
-0.27 3.86 9.5 50.16 NA 24.74

Understanding the Portfolio:

Reliance Tax Saver Fund Plan continues to be a high-return high-risk game for investors.
It may not go down well with investors who are looking for stability over flashy returns.
Its concentration in small and mid cap stocks is a testimony to this fact. Mid caps and
small caps occupy humungous space in its portfolio, at 36 and 43 per cent, respectively.
Large cap companies have a small presence in its portfolio (6.55 per cent in May, 2007).

The fund is no doubt aggressive but it has been able to justify its strategy through good
returns. The fund is not only aggressive in selecting stocks but also churns its portfolio
very vociferously.

91
Basic Engineering sector remains the top holding of the fund followed by Automobile,
Technology and Construction. Areva T and D India Ltd is currently its top holding with
an over 7.39 per cent allocation (as per May 2007 portfolio). Alstom Projects India Ltd
(5.36 per cent), Punjab Tractors Ltd (4.86 per cent) and Tata Consultancy Services Ltd
(4.26 per cent) are the other major holdings.

Our View:
Risk-averse investors may complain about the volatility factor in an equity-linked
instrument but the same is taken care of by the mandatory three-year lock-in period.
Equities tend to be volatile over the short-term, but the performance tends to get
smoothened-out over a longer, three-year time frame. Even the fund manager is not under
pressure to take risky, aggressive investment calls to deliver short-term growth, as
investors are in the Fund for the long haul. This translates into lower volatility in an
ELSS, as compared to that in a diversified equity fund. Moreover, equities outperform
other investment avenues like bonds, real estate and gold, over the long term (at least 10
years). Therefore, ELSS offers investors a window to benefit from the 'power' of equities
and also claim tax benefits to boot! No doubt NSC and PPF offer investors an assured
return, but equities have the potential to offer a higher return vis-à-vis fixed income
avenues, as has been established in several studies.

Another factor that is often ignored by investors and rarely factored-in while calculating
returns is inflation. Inflation dampens returns and pulls down the 'real return on
investment'. To put it simply, if your investment offers you a return of 8% p.a. and
inflation is at 4%, your real return is (8% minus 4%) 4%, at the end of the first year.
Equities are the only investment avenue that can counter inflation effectively and enable
investors to post a healthy return, post-inflation.

92
Our Recommendations
Out of the list of ELSS stated in the above we recommend ICICI Prudential Tax Plan,
Reliance Equity Tax Saving Plan and UTI Tax Saver Fund. All of these schemes have
been performing consistently from past five years and have witnessed rough phases of the
market. Also, all of them command reasonably good risk-ratios; out of this ICICI Pru Tax
Plan and UTI Tax Saver Fund are more aggressive than Reliance Equity Tax Saving.
Therefore, investors can pick any of these three schemes according to their risk profile.

93
Section IV- Diversified Equity Funds

Equity fund is one of the oldest and most widely found fund types of mutual fund.
Technically, a mutual fund scheme that has more than 65% of its total investments in
equities and other equity linked products is regarded as an equity fund. so the schemes
like sector schemes, growth schemes, tax saving schemes are primarily equity schemes.
Diversified Equity funds diversify their portfolio evenly across stocks and industry
sectors. The returns from them tend to be moderately high over a long-term horizon but
since the prices of equity shares fluctuate on the stock markets, the net asset value is
subject to these fluctuations. These funds suit investors who have moderate risk appetite.
In a diversified fund, the risk of down-side is mitigated by the breadth of variety of stocks
in the portfolio. Since the portfolio is diversified, the under-performance in some stocks
or sectors in which the fund has invested is balanced by the superior performance of other
stocks or sectors. Such schemes are designed for the investors who have an investment
horizon of at least 3 to 5 years and are also willing to take some risk, though the risk
appetite may not be too big.
There is a lot of buzz of equity funds since all fund houses have multiple equity funds. So
here we are making an attempt to compare diversified equity funds of various fund
houses.

94
Canbank Mutual Fund: Canequity Diversified - Growth.

Fund Snapshot:
Structure Open Ended Equity fund
Fund Manager N S Sriram (since 22/1/06)
Fund Objective To generate capital appreciation by investing in
equity and equity related securities
Inception Date 12th September, 2003
Fund Size 98.0789 crore Rs.
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth option : Rs. 31.11
Minimum Investment Rs. 5000
Benchmark S&P CNX Nifty

Style Box:

95
Portfolio as on 31st May, 2007:

Asset Allocation as on 31st May, 07

4% 4% 4%0% 15%
6%
7% 15%

7%
7% 13%
8% 10%

Energy Basic/Engineering Technology

Diversified Construction Health Care
Services Metals and Metal Products Financial Services
Automobiles FMCG Chemicals

Portfolio as on May , 07 % of Net Assets

Energy 14%
Basic/Engineering 14%
Technology 12%
Diversified 9%
Construction 8%
Health Care 7%
Services 7%
Metals and Metal Products 6%
Financial Services 5%
Automobiles 4%
FMCG 4%
Chemicals 3%

Understanding the Portfolio:

The fund aims at achieving capital appreciation of investment through investing in
growth shares of large cap companies. As we can see, the maximum investment is made

96
in the energy and Basic/Engineering sector, followed by technology sector. The portfolio
also has invested significant amount in Health Care, the relatively new sector.

Comparing fund’s performance to the category average:

The above graph shows that the fund is performing at par with the category average. The
fund neither outperforms nor underperforms the category average with a major margin.

Our View:
The fund is expected to de well since its major contribution comes from industrial capital
goods sector. Capital goods sector is giving attractive returns and is expected to
consistently perform well.

97
DSP Merrill Lynch Equity Fund
Fund Snapshot:
Structure Open Ended Equity fund
Fund Manager Anup Maheshwari
Fund Objective The scheme seeks to generate long-term capital
appreciation, from a portfolio which is substantially
constituted of equity and equity related securities and
may also invest a certain portion of its corpus in debt
and money market securities, in order to meet
liquidity requirements from time to time.

Inception Date 15th April, 1997

Fund Size Rs. 98.0789 crore
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth option : Rs. 31.11
Dividend option : Rs. 14.91
Minimum Investment Rs. 5000
Benchmark BSE 2000

Style Box:

Portfolio as on 31st May, 07

98
 Asset Allocation as on May, 07
3%2%2%
5%3% 23%
5%
6%

6% 17%
8%
10% 10%
Technology Energy
Services Financial Services
FMCG Basic/Engineering
Health Care Metals & Metal Products
Diversified Chemicals
Construction Automobile
Textiles

Portfolio as on May, 07 % of Net Assets

Technology 22%
Energy 16%
Services 10%
Financial Services 10%
FMCG 8%
Basic/Engineering 6%
Health Care 5%
Metals & Metal Products 5%
Diversified 5%
Chemicals 3%
Construction 3%
Automobile 2%
Textiles 2%

Understanding the Portfolio:

99
The fund is particularly a mid cap fund. it has a blend of growth as well as value shares
of mid-cap companies. The portfolio shows that the maximum investment is made in the
technology sector, followed by energy sector followed by services and financial services
sector.

Performance Record:

Returns of the Fund Compared to the Benchmark

70.00%
58.11%
60.00%
52.11%
50.00%
42.86% 42.53%
39.88%
40.00% 33.07%
28.93%
30.00%

20.00% 14.90%

10.00%

0.00%
Last 1 year Last 3 Years Last 5 Years Sice Inception

DSPML Equity Fund S&P CNX Nifty

The above graph shows the comparison of the fund’s performance with that of the
benchmark – S&P CNX Nifty. it is shown that the fund has consistently outperformed the
benchmark ever since its inception.

Our View:
Mid-caps have not been doing well in past one year. Even though the fund has given very
good returns compared to the benchmark. In coming time, the mid-caps are expected to
undergo a turnaround. As a result this fund certainly has very good returns because, even
in the adverse scenario for the mid-cap companies, it has consistently given good returns,

100
so if the scenario changes to better, we can surely expect robust returns. This fund is a
good bet for the investors who have a longer time horizon, say, more than 3 years.

101
UTI Masterplus Plan:

Fund Snapshot:
Structure Open Ended Equity fund
Fund Manager Sanjay Dongre.
Fund Objective To achieve long-term capital appreciation through
investments in equities and equity related
instruments, convertible debentures, derivatives in
India and also in overseas markets.
Inception Date 9th December, 1991
Fund Size (as on 31st May) 964.60 crore Rs.
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth option : Rs. 69.66 (introduced w.e.f. 1/8/05)
Income option : Rs. 53.46
Minimum Investment Rs. 5000
Benchmark BSE SENSEX

Style Box:

Portfolio as on 31st May, 07:

102
 Sector Allocation as on 31st May, 07

6% 5% 2%
1%
0%
27%
8%

9%
14% 14%
14%

Technology Financial Services Diversified

Energy Basic/Engineering FMCG
Automobile Construction Textiles
Services Health Care

Portfolio as on May, 07 % of Net Assets

Technology 28%
Financial Services 14%
Diversified 14%
Energy 13%
Basic/Engineering 8%
FMCG 8%
Automobile 5%
Construction 5%
Textiles 2%
Services 1%
Health Care 0%

Understanding the portfolio:

It is positioned as a fund which primarily invests in stocks comprising of BSE 100 Index.
It aims to focus on high growth stocks of BSE 100 index which has the potential to
emerge as industry leaders in medium term. Hence portfolio of the fund will present a
good blend of industry leaders and emerging industry leaders.

103
As we can see from the style box, this fund invests in growth shares of large cap
companies. The fund is well diversified, with investment in sectors such as technology,
financial services, energy, FMCG, automobiles, construction etc. Closely analyzing the
portfolio, we understand that the contribution of the technology sector is highest followed
by services and energy. The fund has invested in technology sector in companies like
Bharti Airtel, Reliance Communications, Tata Consultancy Services, Bharat Electronics,
and Infosys. The portfolio is skewed towards large cap as the fund seeks to maximize the
risk-return payoff. The fund has investment in other reputed companies like UTI Bank,
SBI, Mahindra and Mahindra, ONGC, Siemens, Larsen and Tubro and many more.

Comparing fund’s NAV with the Benchmark

The following graph shows the comparison of fund’s NAV with BSE SENSEX.

We can see that the fund has been giving returns almost similar to its benchmark. It is
observed that it has never been able to outperform the benchmark with a great margin;
nevertheless, it has never dipped down with a great margin in comparison to the
benchmark. If we consider the returns from February, 07 to March’07 we realize that the
fund is giving lesser returns. Also, during the third quarter of FY 06-07, the downfall in
NAV is mainly because of the dividend declared in the month of Nov, 06.

104
Our View:
We believe that the fund is underperforming since last 4 months majorly because of rupee
appreciation, the technology sector contributes the highest percentage to the portfolio and
hence the impact of appreciation of INR is clearly seen. However, it is expected that INR
would stabilize and would not experience much correction. As a result, we expect this
fund to bounce back.

105
ICICI Prudential Power Plan:
Fund Snapshot:
Structure Open Ended Equity fund
Fund Manager Anand Shah
Fund Objective Long term investment of funds for capital
appreciation in a concentrated multi sector portfolio.
Inception Date 1st January, 1994
Fund Size Rs. 1,558.24 Crores
Face Value (Rs./Unit) Rs. 10
NAV (as on 30th April, 2007) Growth option : Rs. 89.20
Dividend option : Rs. 21.77
Minimum Investment Rs. 5000
Benchmark S&P CNX Nifty

Style Box:

106
Portfolio as on 31st May, 07.

Asset Allocation as on May, 07

12% 2%
2%2%
2%3%
4%
4%
12% 5%

7%
11% 7%
11% 8% 8%
Auto Anicilliarie Oil Construction
Auto Anicilliarie Transportation Textile - Products
Industrial - Products Cement Telecome Services
Pharmaceuiticals Ferrous Metals Petroleum Products
Industrial Capital Softw are Media
Banks

Portfolio as on May, 07 % of Net Assets

Auto Ancillaries 1%
Oil 2%
Construction 2%
Auto 2%
Transportation 2%
Textile – Products 3%
Industrial - Products 3%
Cement 4%
Telecom Services 7%
Pharmaceuticals 7%
Ferrous Metals 7%
Petroleum Products 7%
Industrial Capital 10%
Software 11%

107
 Media 11%
Banks 12%

Understanding the Portfolio:

The fund seeks to optimize risk- adjusted returns by building a portfolio of predominantly
large and mid-cap stocks across selected sectors. As we can see from the style box, the
fund concentrates itself in most of the large cap investments along with mid cap
investment. Banking sector holds the highest investment in the portfolio followed by,
software, media and industrial capital goods sector. The top holdings of the portfolio are
Reliance Industries, Bharati Airtel, Punjab National Bank, ICICI Bank, Zee
Entertainment Enterprises.

Comparing the Fund’s Performance with the Benchmark:

The graph below indicates the movement of Rs. 10000 invested at inception vis-à-vis the
benchmark performance.

Performance Record:

108
We can see from the above graph the fund has constantly outperformed its benchmark
ever since its inception except for last one year. But the fund has bounced back in last six
months.

Our View:
The fund’s major investments are made in the banking, media and software sector. The
fund is expected to perform very well since; the outlook of the equity market considers
banking sector as the flagship fund (as on 31st May, 07). The performance of the fund
was not affected by the rupee appreciation even though software sector holds the second
largest investment because the banking sector has given robust returns. So the downfall
that was expected because of rupee appreciation was compensated by the robust returns
of the banking sector. The fund has great potential firstly because rupee appreciation is
expected to stabilize and hence the returns can rise again from this sector. Secondly, the
media sector is giving attractive returns which would certainly improve the funds
performance since media occupies second highest part of the portfolio and thirdly, the
banking sector is giving robust returns.

109
Reliance Equity Advantage Fund:

Fund Snapshot:
Structure Open Ended Equity fund
Fund Manager Ashwani Kumar
Fund Objective The primary investment objective of the scheme is to
achieve long-term growth of capital by investment in
equity and equity-related securities through a
research-based investment approach.
Indicative Investment Horizon 5 yrs. & more
Inception Date 8th October, 1995
Fund Size Rs.2,970.37 Crores
Face Value (Rs./Unit) Rs. 10
NAV (as on 31st May, 2007) Growth Plan - Growth option : Rs. 200.00
Growth Plan – Bonus Option : Rs. 33.52
Dividend option : Rs. 51.05
Minimum Investment Rs. 5000
Benchmark BSE 100 Index

Style Box:

Portfolio as on 31st May, 07:

110
 Sector Allocation as on 31st M ay, 07

3% 2%
4% 3% 13%
5%
11%

8%
8% 11%
8% 9%

Technology Automobile
Diversified Basic/Engineering
Energy Services
Health Care Construction
Financial Services FMCG
Chemicals Metals and Metal Products

Portfolio as on May, 07 % of Net Assets

Technology 13%
Automobile 11%
Diversified 11%
Basic/Engineering 9%
Energy 8%
Services 8%
Health Care 8%
Construction 5%
Financial Services 4%
FMCG 3%
Chemicals 3%
Metals and Metal Products 2%

Understanding the Portfolio:

The fund is positioned as a growth fund investing in large cap companies. Technology
sector holds the highest investment in the portfolio followed by the automobile and
diversified followed by basic / engineering. The top holdings of the fund are Infosys

111
Technologies, Larsen & Tubro, Reliance Communications, Tata Motors, HPCL, TCS,
Siemens and the list continues.

Performance Record:
The graph below shows the comparison of fund’s performance with SENSEX.

Comparison of Fund's Performance with SENSEX

70.00%
58.71%
60.00% 53.08% 50.17%
48.38% 46.16%
50.00% 43.20% 43.28%
40.00% 33.72%
30.00%
20.00%
10.00%
0.00%
Last 1 Year Last 3Years Last 5 Years Since Inception

Reliance Vision SENSEX

It is clearly seen that the fund has consistently outperformed the SENSEX with a
considerable margin ever since its inception. Returns are good since investment is made
in the growth shares of the large cap companies.

Our View:
The fund is positioned as a growth fund because investment is being made in the growth
shares of the large cap companies. As we can see above, returns have been consistent and
this trend is expected to continue in coming time too. Growth in returns may also be
expected since the fund has sustained rupee appreciation. Now that rupee is expected to
stabilize, good returns can be expected from the technology sector, it being the one
holding the highest investment. Technology sector is followed by the automobile sector.
Automobile sector is also expected to give attractive returns and hence, the returns from
this fund would surely be attractive. The fund has very less investment in the financial

112
service sector. This is the plus point of the fund since banking sector is expected to under
perform, banking sector would only form some part of the investment in the financial
service sector. This will help the fund to avoid the burnt of downfall in the banking
sector.

113
Section V- Debt Funds

Across the investing community, most investors turn to liquid funds to park their
investible short term funds as they offer superior returns than bank fixed deposits. Liquid
fund is a good vehicle to park the funds with almost negligible chance of capital
depreciation. The average return that the investors get comes to around 6.5 per cent to 7
per cent. The investors are unwilling to invest in income or gilt funds on account of the
risk of capital depreciation in the short term as these funds with their longer average
maturity are exposed to the impact of market volatility. In the short run, investors may
have to bear capital depreciation in case unfavorable market conditions.
Investors who have short term investment needs, instead of going for liquid funds, if they
are willing to take little extra risk, can think of investing in short term debt schemes
offered by mutual funds, which offer higher returns than the liquid funds. Such schemes
are short term gilt funds, Fixed Maturity Plans (FMPs), short term debt plans etc.
Fixed-income funds (i.e. debt funds) are likely to provide better risk-adjusted and tax-
adjusted returns to an investor over a period of time.
Let us understand how fixed income mutual funds work. Fixed-income mutual funds
receive money from various investors and they in turn invest in variety of fixed income
securities depending on the view on interest rates. Because of their size and reach, they
may be in a position to bargain better interest rates on fixed-income securities than retail
investors could possibly obtain. If the view on the interest rates is that they are going to
come down, the fund may invest in long-dated fixed-income securities to capitalise on
possibility of price appreciation as the interest rates decline. It has been observed that due
to their presence and continuous monitoring of the fixed income market, fixed-income
mutual funds are in the position to offer better risk-adjusted returns.
Apart from offering attractive returns, fixed-income mutual funds offer liquidity to the
investor, which may not be available to retail investor in case if the investor decides to
invest on his own. This element of safety combined with liquidity, and attractive risk-
adjusted returns may provide the investor with an attractive investment proposition.

114
ICICI Prudential Short Term – G:
Fund Snapshot:

Structure Open Ended Short Term fund (Debt)

Fund Manager Chaitanya Pande
Fund Objective The scheme aims to generate income through
investments debt and money market instruments,
Debt Securities upto 100 per cent, Money Market
instruments and cash upto 50 per cent, while
maintaining low to medium maturity profile of the
portfolio.
Indicative Investment Horizon 5 yrs. & more
Inception Date Oct, 2001
Face Value (Rs./Unit) Rs. 10 abc
NAV (as on 30th April, 2007) Growth option : Rs. 242.14 Crores
Minimum Investment Rs. 5000
Expense Ratio 1.10%
Benchmark CRISIL ST Bond

Style Box:

115
Portfolio:
Instrument Break-Up As on 31st May, 2007:

Instruments % Net Assets

Commercial Paper 32.59
Cash, Call and Others 26.78
Securitised Debt 22.44
Bonds/NCDs 18.19
Total 100

Portfolio Characteristics:

Portfolio as on 31st May, 2007 (% to NAV)

P1+ 52.26
Cash & Money Market 26.78
Unrated 10.32
AAA 7.75
AA 2.89
Total 100

Understanding the portfolio:

In this particular fund minimum investment of Rs 5000 and maintain the balance is also
of Rs 5000.The fund style of ICICI Prudential is medium – low. Its concentration in P1+
and cash & money market is a testimony to this fact.P1+ and cash & money market
occupy humungous space in its portfolio, at 52.26 and 27, respectively. Unrated have a
small presence in its portfolio (10.32 per cent).
As asset allocation, its concentration in Debt fund around 73 per cent and others around
27 per cent.

116
The average maturity period is 0.52 years and Average yield to maturity is around 11 per
cent. Others remain the top holding of the fund followed by UTI bank, Canara bank and
Ranbaxy Holding Co.Pvt.Ltd.

117
Reliance Short Term – G:
Fund Snapshot:
Structure Open Ended Short Term fund (Debt)
Fund Manager Prashant R Pimple
Fund Objective The scheme aims to generate stable returns for
investors with a short term horizon by investing in
fixed income securities of a short term maturity.
Indicative Investment Horizon 5 yrs. & more
Inception Date Dec, 2002
Face Value (Rs./Unit) Rs. 10
NAV (as on 31st May, 2007) Growth option : Rs. 238.43 Crores
Minimum Investment Rs. 50000
Expense Ratio 0.64%
Benchmark Crisil Liquid
Style Box:

Portfolio:
Instrument Break-Up As on 31st May, 2007:
Total 100
Instruments % Net Assets
Bonds/NCDs 45.29
Certificate of Deposit 32.65
Pass Through Certificate 15.43
Cash & Net Receivable/Payable 6.42
Commercial Paper 0.21

118
Portfolio Characteristics:

Portfolio as on 31st May, 2007 (% to NAV)

AAA 42.87

P1+ 28.66

AA+ 13.25

A+ 8.81

Cash & Money Market 6.41

Total 100

Understanding the Portfolio:

In this particular fund minimum investment of Rs 50000 and maintain the balance is nil.
The fund style of Reliance Short Term is high – medium. Its concentration in AAA and
P1+ is a testimony to this fact.AAA and P1+ occupy humungous space in its portfolio, at
42.87 and 28.66, respectively. AA+ has a small presence in its portfolio (13.25 per cent).

As asset allocation, its concentration in Debt fund around 94 per cent and others around
6 per cent.

The average maturity period is 1.13 years and Average yield to maturity is around 8 per
cent. Others remain the top holding of the fund followed by Allahabad bank, G E Capital
Services and DSPML Capital.

119
UTI Liquid Short Term - G
Fund Snapshot:
Structure Open Ended Short Term fund (Debt)
Fund Manager Sanjeev Bhasin
Fund Objective The fund seeks to generate steady and reasonable
income, with low risk and high level of liquidity
from, a portfolio of money market securities and high
quality debt.
Indicative Investment Horizon 3 yrs. & more
Inception Date June, 2003
Face Value (Rs./Unit) Rs. 10
NAV (as on 31st May, 2007) Growth option : Rs. 7.41 Crores
Minimum Investment Rs. 30000
Expense Ratio 0.75%
Benchmark CRISIL ST Bond
Style Box:

Portfolio:
Instrument Break-Up As on 31st May, 2007:

Instruments % Net Assets

Bonds/NCDs 66.28
Net Current Asets 33.72

Total 100

120
Portfolio Characteristics:

Portfolio as on 31st May, 2007 (% to NAV)

AAA 66.28

Cash & Money Market 33.72

Total 100

Understanding the Portfolio:

In this particular fund minimum investment of Rs 30000 and maintain the balance is not
required. The fund style of UTI Short Term is high - medium. Its concentration in AAA
and cash & money market is a testimony to this fact. AAA and cash & money market
occupy humungous space in its portfolio, at 66.28 per cent and 33.72 per cent,
respectively.

As asset allocation, its concentration in Debt fund around 66 per cent and others around
34 per cent.

The average maturity period is 1.19 years. Others remain the top holding of the fund
followed by National Bank Agr Rur Devp, Export-Import bank and Citi Corp Maruti Fin.

Our View:

In the current period, liquid funds and floaters are a better bet than longer duration funds.
In the income fund category, the short term plans are very good products offering
attractive risk adjusted returns in the current environment. Inflation should be in a band
of 5% to 5.5% over the year and would be higher than what the government is projecting.
Investors should look at debt fund returns with a one-year investment horizon. Markets
are expected to be more volatile in the short term and returns would be more normalized
over a one-year period.

121
An uncertain market has given a good opportunity for making new investments. But,
what can present investors do in such a scenario? From the above portfolio of three
companies, one can clearly see that investments made 2 months before are still giving
decent returns. If the uncertainty continues, fund managers would change the duration to
minimise any negative impact. But one has to keep in mind that the days of astronomical
returns are over. Given the running 6.5-6.75 per cent yield on portfolios, returns would be
around 7.5-8 per cent, depending on your holding period.

For short-term investors, who have an investment horizon of around 3 months and are
invested in short term income funds, can liquidate now and park the proceeds in liquid
funds, as the risk-reward ratio for these short-term investors looks negative. Though
negatives in the market will get smoothened in the long run, markets may remain
extremely choppy in the short run; it would therefore be prudent to shift your money to
liquid funds, adopting a wait-and-watch strategy.

122
Our Recommendation
Out of the list of Debt Fund stated in the above we recommend Reliance Short Term
fund, ICICI Prudential Short Term fund and UTI Short Term Fund. All of these schemes
have been performing consistently from past five years and have witnessed rough phases
of the market. Also, all of them command reasonably good risk-ratios, out of these;
Reliance Short Term fund and ICICI Prudential Short Term Fund are more aggressive
than UTI Short Term Fund. Therefore, investors can pick any of these three schemes
according to their risk profile.

123
Bibliography:
 AMFI Handbook
 Indian Financial System by Bharati V Pathak
 www.investopedia.com
 www.mutualfundsindia.com
 www.valueresearchonline.com
 www.myiris.com
 www.amfi.com
 www.canbankmutual.com
 Fund Factsheet- ICICI Prudential
 Fund Factsheet- DSP Merrill Lynch
 Fund Factsheet- UTI
 Fund Factsheet- LIC
 Fund Factsheet- Raliance Mutual
 Fund Factsheet- Canbank Mutual

124